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When to sell? Matrix and other adventures in Value.able Investing

When to sell? Matrix and other adventures in Value.able Investing

In August 2010 Matrix Composites & Engineering, when we first began commenting on the company, was trading around $2.90. Thirty days later the share price was at $4.48. Today MCE is trading at just over $9.00 and has a market capitalisation of more than half a billion dollars. It’s no longer just a little engineering business. Like the Perth industrial precinct of Malaga in which its headquarters are based, MCE is growing rapidly (according to Wikipedia there are currently 2409 businesses with a workforce of over 12,000 people in Malaga. The 2006 census listed only 28 people living in the suburb).

But has MCE’s share price risen beyond what the business is actually worth?

Stock market participants are very good at telling us what we should buy and when. When it comes to selling, it seems silence is the golden rule.

If you receive broker research, take out a report and turn to the very back page – the one beyond the analyst’s financial model. You will often find a table that lists every company covered by that broker’s research department. Now look to the right of each stock listed. What do you notice?

Buy… Buy… Hold… Buy… Buy… Accumulate… Hold…

What about sell?

There aren’t many companies in Australia worthy of a buy-and-hold-forever approach. And if you have invested in a company with a previous BUY recommendation, the luxury of a subsequent Ceasing Coverage announcement by the analyst is not helpful.

So then, when should you sell? It is a question I have been asked, to be honest, I can’t remember how many times. Because I have been asked so many times, it’s a question I answered in Chapter 13 of Value.ablea chapter entitled Getting Out.

Value.able Graduates will recognise a sell opportunity. Yes, it is an opportunity. Fail to sell shares and you could eventually lose money.

Of course, any selling must be conducted with a certain amount of trepidation, particularly when capital gains tax consequences are considered. But not selling simply because of tax consequences is unwise.

We pay tax on our capital gains because we make a gain. Yes, its difficult handing over part of our investment success to the Tax Man for seemingly no contribution, but without success our bank balance would remain stagnant forever.

When then should you sell? In Value.able I advocate five reasons. For now I would like to share with you a possible reason.  Based on any of the other reasons I may be selling Matrix so make sure you understand this is a review based on one of five reasons.

Eventually share prices catch up to value. In some cases it can take ten years, but in the case of Matrix, it has taken far less time for the share price to approach intrinsic value.

One signal to sell any share is when the share prices rise well above intrinsic value.

There are no hard and fast rules around this. And don’t believe you can come up with a winning approach with a simple ‘sell when 20% above intrinsic value’ approach either.

What you MUST do is look at the future prospects. In particular, is the intrinsic value rising? I believe it is for Matrix (and I am not the only fund manager who does – you could ask my mate Chris too).

Here’s some of his observations:  Risks associated with the timing of getting Matrix’s facility at Henderson up and running are mitigated by keeping Malaga open. And Malaga is producing more units now than it was only a few months ago. Matrix could also produce more units from Henderson than they have suggested (the plant is commissioned to produce 60 units per day) and I believe the cost savings will flow through much sooner than they say. Recall the company has indicated Henderson could save circa $13 million in labour, rent and transport costs (see below analyst comment). Excess build costs are now largely spent and if the company can ramp up to 70 units a day, HY12 revenue could double.

Why do I believe this? Because a recent site visit for analysts suggested it. As one analyst told me: “Production of macrospheres has started from Henderson with 7 of the 22 tumblers in operation. This is a good example of the labour savings to come as it’s now a largely automated process – there were only 3 people working v >20 on this process at Malaga.”

(Post Script:  My own visit to WA at the weekend revealed a company capable of producing just over 100 units per day – Henderson + Malaga)  Moreover, the sad events unfolding in Japan will force a rethink on Nuclear.  If nuclear energy – recently hailed as a green solution to global warming – reverts to being a relic of an old world order, demand for oil will increase.  Oil prices will rise.  Deep sea drilling will be on everyone’s radar even more so.

And the risks?  Well, one is pricing pressure from competitors. This is something that needs to be discussed with management, but preferably with customers!

Some Value.able Graduates may be reluctant to place too much emphasis on future valuations. Indeed I insist on a discount to current valuations. If it is your view that future valuations should be ignored, then you should sell.

Personally I believe one of my most important contributions to the principles of value investing is the idea of future valuations. Nobody was talking about them at the time I started mentioning 2011 and 2012 Value.able valuations and rates of growth. They are important because we want to buy businesses with bright prospects. And a company whose intrinsic value is rising “at a good clip” demonstrates those bright prospects.

If you have more faith and conviction that the business will be more valuable in one, two and three years time, you may be willing to hold on. On the basis of this ONE reason I am currently not rushing to sell Matrix (of course I may sell based on any of the other four reasons), however notwithstanding a change to our view (or one of the other four criteria for selling being met) I do hope for much lower prices (buy shares like you buy groceries…)

I cannot, and will not, tell you to sell or buy Matrix and I might ‘cease coverage’ at any time. As I have said many times here, do not use my comments to buy or sell shares. Do your own research and seek and take personal professional advice.

What I do want to encourage you to do is delve deeply into the company’s history, its management, their capabilities, recent announcements and any other valuable information you can acquire.

And in the spirit demonstrated by so many Value.able Graduates, feel free to share your findings here and build the value for all investors.

When the market values a company much more highly than its performance would warrant, it is time to reconsider your investment. Looking into the prospects for a business and its intrinsic value can help making premature decisions. Premature selling can have a very costly impact on portfolio performance not only because the share price may continue rising for a long time, but also because finding another cheap A1 to replace the one you have sold, is so difficult. At all times remember that my view could change tomorrow and I may not have time to report back here so do your own research and form your own opinions. Also keep in mind that we do not bet the farm on any one stock so even if MCE were to lose money for us (and we will get a few wrong) we won’t lose a lot.

Posted by Roger Montgomery, author and fund manager, 18 March 2011.


Roger is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

Why every investor should read Roger’s book VALUE.ABLE


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  1. Hi Roger.Share placement(capitol raising) for MCE.I can’t understand why it is good for some companies to raise capitol and for some it is negative.Can you please explain it?

  2. I know lots of people are going to ask you about the JBH share buyback Roger. As I have it at a discount to IV I see it as good timing and a better alternative than a dodgy acquisition. You?

  3. Ash, Thanks a lot re SIV. I shouldn`t have taken them up, so will get out when I can. I tend to rush into things.

    • Hi Ken,

      Hope it goes well,

      Just some help with the Blog. if you click reply directly under the comment you are refering to then it will appear indented under it.

      If you go right to the bottom to reply your comments wont be near the post you are refering to.

      Makes it easier for us all to follow the thread.

      Take care

  4. Hi Roger/All,

    I was interested to hear your liking of Codan (CDA) tonight on Sky. I also like the company, though the debt levels concern me (currently 50%). I suspect you don’t see this as an ‘A’ rated company given the debt levels, though also deduce that you think its debt will decrease over coming years and its MQR will increase. I would appreciate people’s thoughts on this stock as I believe it has good potential into the future.

    • Hi James,

      I will put a post up soon with a brief on each of the stocks mentioned on Switzer. Gosh 15 minutes flies. I had no time to go into any detail and constantly in the back of my mind was the other three stocks I wanted to mention that I had no time for. Unlike some of the others mentioned, Codan is not one that I currently own.

      • I notice one of the directors bought 50k shares recently.
        How do my numbers look on this one? (Taken from Etrade) :

        Code: CDA
        Price: 1.24

        ……….. EqPS .. Shares … DPS … EPS … RR
        Next Yr … 0.46 .. 164.10 … 0.082 .. 0.143 .. 14
        Curr Yr … 0.40 .. 164.10 … 0.080 .. 0.177 .. 14
        Prior Yr … 0.39 .. 164.10

        ………….. IV .. .. ROE . NPAT .. POR
        Next Yr … 1.54 … 33 .. 23.466 .. 57%
        Curr Yr … 0.78 …. 22 .. 14.400 .. 45%

      • Yes Roger, it flies for us too. I think we should all lobby Switzer for more ‘Roge time’ – I think more and longer sessions with ‘our Leader’ would be waaaaay better than a lot of the other stuff Mr Switzer has on…..

    • Hi Ann, don’t try to predict the markets. It is a frustrating process and very rarely will you be right. Focus on the companys and invest for the long term in businesses with rising values, the market will eventually catch up or fall towards the value of the business.

      The market could halve tomorrow and people will run screaming for the hills its the end of the world, but nothing has changed in the world of that particular business and it isn’t necessarily worth any less if the market does half.

  5. Ash, Robert, Paul and Ron, Thanks everyone for that on SIV. Fantastic. It has confirmed my decision of what to do. Ash you are right re RBS Morgans and everything else as usual. Thanks a lot everyone.

    • Hi Ken,

      I am not saying this is this situation in this case but I get very sad when brokers put the relationship with the institution ahead of the retail client.

      RBS has earned a fee to place this stock with you and I bet they weren’t recommending the stock before the slight of hand divy payment.

      You have said that you have taken them up and they are trading at a discount to the price you paid so it all looks rosy ATM but I have seen all too often in the past that when the shares issue there are lots of people who purchased them so that they can make a profit by selling them on market.

      The laws of supply and demand apply and no one can predict share prices but history suggests that when you get a chance to sell then the price and profit will not be a juicy as it is now.

      We all know Buffets first two rules rules but rule number 3 for the retail investor is your broker may not be acting in your best interest

      Just my view and it will be interesting to see what happens.

  6. Kent Bermingham

    I know that we must study a company in detail and also look at the qualative aspects but here is a quick way for us learners to get a rough cut of the qualntative financials of all the companies we are interested in very quickly.
    I am assuming we all have our excel tables showing
    Current Equity Per Share
    Issued Capital
    Book Value

    Payout Ratio

    Prior Years Equity

    Required Return

    Income Calculation
    Growth Calculation

    Intrinsic value

    Current Price

    Finally Margin of safety

    We then methodically go through E Trade to plug in detail line by line which is time consuming and tedious to find th 1% of possible gems at the bottom of te river.

    Instead try this as a Rough cut to the gems

    Go to Quotes and reseach
    Go To tools
    Go to Advanced Stock Filters

    First Query
    Criteria Market Cap ( use this to help with RR)
    Criteria ROE > 15%
    Debt less than 15%
    Book Value
    Issued Shares

    You will have to divide Book Value by Issued shares using an excel spreadsheet to get value per share ( NUMBER 1)

    Then run another searchSelec
    Criteria Market Cap ( use this to help with RR)
    Criteria ROE > 15%
    Debt less than 15%
    Payout ratio ( Number 2)

    You already have return on Investment above

    Cut and past this info into your spreadsheet

    Re sort your spreadsheet by ROE and required return to assist you to effeciently look up your valuation tables.

    And there you have it your first rough cut to do some seious research and get rid of the noise.

    You will find you can do every company in about 1 hour

    Hope this helps all of us learners out there as I know a few of you have been asking for help on this blog.

    (have a nice day)

    • Hi Kent,

      It makes me and others here really happy to see someone come on to the blog and see their knowledge increase exponentially.

      Nice work and we look forward to future invalu.able contributions

    • G’day Kent,

      Excellent post. For those whose general situation doesn’t leave huge amounts of time to trawl through companies individually, that sort of screening and sorting process should weed out 90% of your gems.

      The only ones that it may miss are the companies undergoing structural change – like Decmil (which had discontinued operations masking a good continuing operation result).

      • Kent Bermingham

        Greg you are 100% correct this first pass was just a guide and is full of holes but as a broad strategy is not a bad first pass I think

  7. John, Better to be an encourager than a knocker but I know what you mean, how do you do it, it`s just showing appreciation. There is so much information and insight shared on this site. I think most people on this blogg try to contribute what ever they can. Some don`t have the knowledge or ability some have both.

  8. Regarding TGA. Would someone put up their IV inputs for TGA please?

    My value seems to be a bit high, so would like to check.


      • yes very close thanks Zoran. i had noticed some valuations on the blog a bit lower… I guess they must be using a different RR to you and I.

        Thanks for taking the time to reply


      • any value you currently have on TGA is meaningless as the current acquisition and the flagged capital raising in the future will change any future IV we currently have.

        its a great business you want to buy under $1.80 at the minimum (10 days ago was a quick opportunity)

        hope that helps

  9. Hi Roger,

    Might be something wrong with the posting time on the Blog because their is no way I was Up at 1 to 2 this morning.

    Not a biggie but it could cause issues later.

    Just as a test I am posting this at 8.55pm Qld time 22 March.

    Be interested to so that time the blog says gives the one hour time lag between Qld & NSW

      • Suggestion:

        Could I make a suggestion that posters place at the head of their comment the stock code or name of the stock they are commenting on? I know if you are reading from this page then it’s easy to follow, but if you’re getting the RSS feed one has to keep clicking on read more to find out what they’re talking about.

    • Jeez Ash,
      I just thought you were a hard worker burning the midnight oil for the valuable community!

    • I am glad you have confirmed my suspicions Ash. I was about to reply to a post of yours with the message, “Ash, go to bed, the blog will be here tomorrow!”

      Roger, Ash is right, its not a biggie, and I know your team have a fair bit on their plate so I think we will survive.

      All the best

      Scott T

  10. ORL is fair value on my numbers at present but the growth prospects seem pretty good with Sally McD’s Asian strategy

    As an aside, I bought a pair of Oroton boxers at DJ’s in the sales, I can say they are the most comfortable pair of boxers I have ever bought!

    Ash, do you think I could deduct this? Market research maybe !

    • I have ORL on about a 9% margin of safety to my 2010 IV. This isn’t enough for me at the moment and i am reserving judgement on the future through forecast IV’s as the half year result wasn’t what i was expected and i think my current forecasts when i get around to it will be revised lower.

      This is also coupled with my uncertainty still over the success of the Asia expansion which a mentioned previously i am 50/50 on.

      • Just re-ran my 2011 forecast IV and it has indeed dropped. I am now getting an 2011 F/IV of $8.89 and a drop in ROE to about 79%.

        I do not actually put too much emphasis on forecast IV’s and use them as a guide only and i still need to get a bit better at this process so don’t pay too much attention but the results did reflect my own views of the companys short term future performance (stable or declining ROE instead of increasing).

        i tend to use more of the value from the last reported FY plus a considerable margin of safety as well as my own analysis of the future prospects. I am still a fan of this company but still a bit expensive for me and want to hear more about Asia.

      • I agree that Oroton Group is a fantastic company run by a great management team. I am concerned, however, that future return on equity will not match the stellar returns achieved over the past few years. Very few companies, even those managed as well as Oroton Group, could match consistently the same ROE year-in and year-out. I would be looking to increase my margin of safety before buying into Oroton.

    • Hi Brad,

      Bit iffy trying to claim undies as a tax deduction really,

      But make sure you talk to your accountant about legitimate deductions like a portion of internet use and a portion of pay TV for the business channel. Also, home office expenses are one to consider but this has to be weighed up with CGT consequences on the sale on the principal place of residence.

      No advice and seek professional advice

      • Hi Ash,
        What percentage of pay TV costs could you legitimately claim on your tax? I watch the business channel, my wife likes the cooking channels and we both enjoy the AFL in winter.
        Brad S

      • Hi Brad,

        This is something to discuss with your accountant,

        But reasonable estimates are a good guide and remember like investing…….best to best conservative .

  11. and Ash, MCE own their own IP

    That’s shed talk for they have patented products

    Much higher barriers to entry to take on MCE than mining services co’s such as FGE, DCG, MIN, SWL, MLD all of which, for good order, I have owned or own

  12. Hi Ashley,

    I actually bought it online at the Apple store (three weeks before the iPad 2 was released – no refund!)

    I’m a bit bearish on JBH, but I do concur with Roger that it will be a better investment than cash going forward, I did sell down some after the last result.

    In terms of retailers I’m comfortable with the ORL and CCV holdings but owning SFH is giving me some buyers remorse! I don’t own WOW or TRS.

    The internet’s effect on traditional retail concerns me but I don’t own and retail properties or REITS – rent deflation in centres and high street stores in the future is a possibility.

    I see Lev bought more AIR today….. They don’t return phone calls and are buying the stock – interesting. PE of 6x.



    • Bummer Brad. The Apple iPad 2 is available from this coming Friday. Apple has a Pricing policy that will guarantee to refund the difference between any pricing change and what you paid for it if the price drops within 14 days of your purchase.
      Apple dropped the price of the iPad 1, by $200, on March 1, when they announced the new iPad so if you bought within 14 days of then you probably have a chance of a refund of the difference.
      Roger, any …even a slim chance of Value.able being made available on iBooks for the iPad?

      • I would also like to see it in other forms. Audio would be handy. I have an audio copy of Come into my trading room by Alexander Elder. His book has as many charts etc as Value_Able and solved this issue by including small copies of the charts in the case the CD’s came in.


      • I agree Wayne,

        Audio would be great but I am not sure if the costs would justify the demand

        I would love to see roger reading of the book

        “So okay”

        LOL refer to you tube switzer for this one LOL

        Please don’t take offence Roger just a country boy having a laugh

      • I’d prefer James Earl Jones in his Darth Vader voice, Ash. Might take three weeks to listen through, though.

  13. A new float is coming up RESOURCE DEVELOPMENT GROUP LTD a mining services company. It seems to me it has a big margin of safety but no forcasts given and low liquidity.

  14. Roger, would you be able to give us your post-capital-raising valuation for Vocus?


  15. Hi Roger,
    Just a comment about MCE now being included in the ASX 300, meaning the index funds now need to buy or sell it- thereby increasing volume of trading and therefore easier to sell or buy MCE ,if someone needed to get out in a hurry as opposed to some other small companies who do not have enough volume of trading

  16. My broker recommended SIV to me, in a short fall in the dividend reinvestment takeup. He has shares at $3.38 for me and I have taken these up. They have a lot of debt. Broker forcast is $7.7 million NP for 2011. Would anyone like to make a comment on this company and what they think of this kind of debt. My thinking is debt is debt and still has to be repaid no matter what kind of debt it is.

    • Last time I looked, Silver Chef had Total Debt / NPAT > 5 which rules it out as an investment for me. If the debt works well for SIV, NPAT will rise relative to debt so that at some time in the future Total Debt / NPAT < 5. At that point, I would investigate it further which may be in a few years time. You can find other stocks that have the same or greater ROE as SIV but negligible debt which makes them relatively less risky.

    • Hi Ken,

      Just had a quick glance. Too much debt for my liking – and yes it will need to be repaid. Debt to equity is about 170% . Also return on capital is about 8% and 2.5% over 5 years, and is cash flow negative. At this stage this company doesn’t appear to be all that healthy by most metrics. On the bright side, debt is coming down, revenue is growing, cash flow is getting closer to positive and ROE is increasing. But I would stay away from this one for now.


    • Hi Ken,

      I will like to bet that your broker is RBS Morgan.

      From what I can see is that the company is paying a dividend but can’t afford to so the dividend has been underwritten by RBS Morgan.

      The company will issue more shares and raise more capital just to pay a dividend.

      This is a totally MAD situation and gives me no confidence in management.

      No advice but it is a screaming AVOID you me

  17. Brian Mc Erlean

    Hi Roger and bloggers
    Managed to get FWD at $10.53 when the radiation was in the air and am very happy. It still meets all my criteria.

    Still a fan of MTS under $4 and got them at $3.86 last week.

    CBA looks like a steal under $50 especially looking at the yield. I am better buying the shares than having savings in a cash management account! Franked income beats cash mangement interest.

    ORL goes ex div on the 24th and I expect it will be a good buy if it drops to $7.50. If the Asian expansion pays off earnings should run.
    Has anybody got views on ORL around $7.50?

    Enjoyed the workshop in Perth – well done. I see the fan base is growing in WA

    • I’m keeping my eye on fwd but it hasnt approached a big enough discount to iv yet, even at 10.53.

    • Also watching ORL. Currently have the IV at 7.60 for 2011 and 8.26 for 2012. RR 10%. So would need to drop a little further for me to get interested again. I currently own a few ORL shares.


  18. Richard Anderson

    Hi All

    We have posted this a few times so sorry if it has been seen but we are first timers. Looking at (TSM) Think Smart and it our first try at IV, we have it at around 44 cents but will have another go – any thoughts from fellow bloggers.



  19. Roger and others, thanks for your input on selling and other related things. One thing i am certain of is that the old broker’s cliche ” It’s not timing the market but time in the market that counts” is absolute bilge. I believe that no matter how good the company, a sense of when to sell part of your holding, and if and when to buy in again, is a useful way to accumulate dollars. It’s not easy to get right, but using the volatility of present times it’s a lot easier than it was, and if you truly follow the IV and have faith in its relevance to eventual market moves, then you can do very well. On February 21, I sold some ORL for $9.40 and some MIN for $13.38 and TGA for $2.12. I’ve since bought MIN for $11.12, and when ORL again falls below my IV, I will buy it again too.
    In the same way I have reduced my cost base for FGE, which I had bought at $3.90, to about $0.35, having sold some for $6.50. I’m just so grateful to Roger and this community for the insight that led to these decisions. I feel like someone who was blind and now can see at last.

    I too am sorry I missed the seminar, Roger, though I thought I saw a note that it would be recorded, and if it was, I’ll gladly invest in a DVD.

  20. Hi all,
    I hate to ask because I know it has been posted before, but no matter how much I search I cannot find one. Does anyone have a spreadsheet that allows you to put in data to produce IV calculation.

    I appreciate this so much as spreadsheets are not one of my strong points.


    • Hi Deb,

      Quite a few of us have developed our own spreadsheet based on Value.able

      I don’t know of any external one about but I would be a bit wary of this if it exists.

      I have a friend who lives about a half hour drive from me ( Hi Tony and best wishes on your hospital visit BTW ) who is a very successful investor with just pen and paper.

      Tony’s portfolio is just superb and he does not use a spreadsheet.

      Hope this helps

    • Hi Deb
      I asked Roger about this late last year and from memory he’s going to put them up as a post in the near future. Don’t quote me but I’m pretty sure they were forwarded by some of our more distinguished members, the likes of Ash and a few others. I think it’ll be worth the wait when we do get them. One thing I might suggest, if you don’t have Excel, I’ve found a new free office program called Libre Office. It opens any Excel documents I receive and if I have to send anything back Excel doesn’t have any problems opening it if I had to make any entries on my end.
      Hope this helps

  21. Thanks for the inspiration and talk Roger. I sold out of two holdings today that I’d been thinking of selling for a while.

    • Nice to hear from you Emily. I am delighted you got a lot from it. Always do your own homework and remember valuing a company is not the same as predicting the share price. Stick to quality however and purchase at rational prices and you should beat the market over the long term. You don’t seem like one to rush, so it should be a worthwhile pursuit.

  22. Sandie Buzzard

    Hello Roger and Rogerites
    I need to ask a few very basic questions.
    1. Why is my calculation (taken from Value.able) for ROE different from the one published in Huntleys? Sometimes they are the same or similar enough but sometimes there are enormous differences.
    2. Is there a list of stocks that gives the MQR anywhere?
    3. Could someone please have a go at explaining ‘investors required return’ as if explaining to a 12 year old?
    Thanks in advance

    • Hi Sandie,

      1. There are a few different ways of calculating ROE and they are most likely using a different method. For example comsec works it out i think based on the ending equity figure, some people here use only the beginning, some average.

      2. There are some posts on this blog (click A1 in categories) that has a list, but as Roger says these may and will change over time and might not be a current reflection. Other than that it is Rogers secret formula and i doubt we will ever know the calculation method and no-one else uses it.

      3. Some others are probably a bit better at this than me as i have kind of morphed it into my own definition and i haven’t read value.able in a while so can’t remember how roger describes it but will have a go. The required return is what type of return you would expect from the investment (i think on a pre-tax basis).

      Personally i liken RR to an interest rate on a loan, the higher the risk the higher the RR i want in order to make myself feel that little bit more secure. However, please don’t misunderstand, i only invest in high quality companies. Risk refers to the fact that not all industries and marketplaces are created equal and high quality companys in some industries are more risky than high quality companys in another.

      Hope this helps, it is not text book and there are probably better people to explain if you want an answer closer to what Roger put in his book, im not really a text book kind of person so tend to tweek concepts around to my own beliefs on business.

    • Hi Sandie
      I don’t subscribe to Huntleys, but as Roger notes in his book (p188-9) some people calculate ROE using equity at the end of the year. This might explain the different.

      With regard to MQR ratings, if you look back through some of the previous blogs you will see Roger’s MQRs for a number of companies. This is a system that Roger has developed and from time to time he is kind enough to share that info with us.

      With regard to ‘required return’, have a look at Roger’s bank account example in his book at Chapter 11. I don’t think I can explain it better than that.


    • Sandie
      If I understand it correctly, the ‘investors required return’ is simply setting yourself a target that you would see as your minimum return on investment that you want to achieve. Different people have different desires…hence the differing targets listed in tables. Naturally if you find an opportunity that meets your desire and it actually does more, then you are even better off. Personally I use just 10% which is Warren Buffet’s lowest consideration. I think he shoots for 15%.
      Good luck….Bernie

    • Twelve year old Eddie has a paper round.

      He bought a bike for $10,000 (its a bloody good bike) and earns $1,000 a year, after all expenses (new tyres, chewing gum) and tax (there’s no tax as the bloke who owns the newsagency pays him cash).

      Eddie’s happy, but he wants a new playstation, so he offers a 50% share in his operation to family members.

      His brother’s keen but the $10 he gets for mowing the front lawn (the backyard is fake grass) means he doesn’t have the money.

      His teenage sister is keen but she’s running up huge mobile phone bills which accounts for all of her pay from McDonald’s.

      His old girl’s keen but she just bought a new Apple product, so she’s got no money to spare.

      His old man however, has squirreled away $5,000 by doing some overtime at work, and had been shopping around for somewhere to put it to work. ING are offering 8% (this is 2013), so the old man says to Eddie: “Look son, I can get 8% at the bank.”

      “You can get 10% with me dad, if you hand over that 5 grand.”

      “Yeah but you might want to do something else one day, or your bike could need replacing, or you could – god forbid son – have an accident. With all that risk involved, I wan’t 12.5%, so I’ll give you $4,000 for me half share.”

      “Four large? You’re killing me dad. Don’t you know banks can go broke?”

      “Not in this country son. I want 12.5%.”

      “There’ll be another GFC, you wait, but people will still want the paper delivered.”

      At that point, the boy’s mother approaches, holding her new iPad.

      The husband looks at her, then back to his son: “Make it $2,500……I want 20%.”

      • And can you edit this line “doing some overtime at work,” so it reads “doing some overtime,” ?

        reads better

      • Anyone who has watched some episodes of the UK’s Dragons Den tv show would have seen this scenario happen a lot. Nice example Craig.

        personally, buying a bike for 10K (obviously overpaid) and a need to buy a playstation (bad acquisition), i don’t think that is a rational decision by the manager so i will pass completley.

    • Hi Sandie,

      1. To start with, there are three different ways you can work out ROE (that I am aware of). There’s return on beginning equity, return on average equity and the dupont method. These three methods will each produce a unique outcome. Another reason ROE may be different is the NPAT may have been “normalized” by having unusual items etc stripped out.
      2. Only on this site I believe.. And only updated at Rogers discretion.. Be careful.
      3. Use a higher RR for smaller cap less liquid companies.. Lower for larger cap high liquidity companies. That’s basically it.

      Hope this helps

    • 3. Have a look at the secret millionaire’s club – Warren Buffet’s cartoon series for kids. Maybe slightly young for a 12 year old – I made my 5 year old sister and 8 year old brother watch this.

      I’m actually surprised no one has mentioned this on the blog previously.

      It’s actually great for adults also – I learnt more watching these than when I spent a year doing finance honours.


  23. Hi Roger,
    Just a general question for all the Graduates after such a timely article on when to sell and the reference to Chapter 13 ‘Getting out’.
    I would be interested to know which chapter in Roger’s book people found the most valuable.(apart from the obvious ‘all the chapters’).I am currently rereading and trying to fully understand Competitive Advantage esp in relation to so many mining services companies doing well.
    Steve PL

      • On Competitive Advantages i thought i would share a thought i had recently when i redesigned my quality scoring system during a great moment of creative clarity. As i tend to be more of a visual thinker and understand things more that are portrayed in an image i came up with the following:

        To continue the trend of calling ideas and concepts cool names i will call it “Andrew L’s Castle Theory” (Patent Pending :P)

        Create the following picture:
        The business is a castle sitting in the middle of a picture.
        The castles army is the financial position of the business holed up inside the castle walls.
        The castle walls height and strength is the brand strength
        The moat around the castle is the competitive advantages of the business.

        Then picture a competiting army trying to destroy the castle and steal its gold.

        Turning it around it means the company has to conquer the moat, (overcome the companies competitive advantage). They have to find a week point in the moat or spend a fortune building a large enough bridge.

        If it can match or overcome the businesses competitive advantage:

        They then have to scale or break down the walls created by the brand strength.

        If they can breach the walls then it becomes a man to man battle of resources (price wars) and the one in the best financial position will be victorious but it will be a bloody, messy battle that will do damage to both castles economies.

        So obviously you want a company with a big enough moat and strong, fortified castle walls which are very high so that incoming forces have to think twice or are prevented completley in getting inside and do damage and if they do then you want to have the strongest and largest financial positon (army).

      • Nice Andrew,

        Buffet said if he was give 500 millions dollars to take down Coke he would give it back and say it was impossible. Now thats a moat and also a sensible general who knows what battles he can win.

    • Same Chapter for me Steve.

      I’ve passed on a number of great opportunities over the past year, and on analysis, it was because the good numbers were all very recent and there wasn’t what I considered enough of a track record. Either that or I relied on the income statement rather than the cash flow to get an idea of returns.

      Clearly I’m missing something.

      I think its being able to recognize something special without having it stand out like dogs balls in the financial statements……..at this stage.

      I’m confident I can value a business on the most recent results, but there’s future prospects and qualitative aspects to consider. That’s what I would like to work on.

    • I have found the cash flow part of the book the most helpfull. For some reason the cash flow statement and reading the statement was something i always had trouble with. This has changed the way i look at businesses and i underestimated the importance.

      It just seems obvious now but i didn’t quite realise back in the day that a company can survive without making a profit but can’t survive without cash.

  24. Hi All
    On 14th March, Paul asked for info on Platinum Asset Management. About contributed equity and reserves. I also had that question, but I have not been able to find where anyone answered. Could someone please point me in the right direction.

  25. Firstly, thank you, Roger for your excellent book. I have read just about everything Warren Buffet has written for the last twenty or so years and have benefited greatly in my investment journey by doing so. Your book is a very worthy addition to the world of value investing. I’d like to add my tuppence worth on analysts: having been the Financial Director of a LSE quoted company for a number of years I regularly dealt with analysts. Naturally they have to rely heavily on what the companies tell them. We were always very conservative with our forecasts and always came out ahead of expectations, only letting the analysts upgrade their forecasts much closer to the time of our results. I get a sense of deja vu reading Steve’s comments on MCE’s forecasts. The only advice I can give is get to know the companies in which you invest really well and you will come to recognise the one’s whose forecasts can be treated as generally being a bit conservative as opposed those who are habitually over optimistic. I hope this is helpful and thanks to everyone for their comments on Roger’s blog

    • Hi Grant,

      I couldnt agree with you more. In 2008 FMG commissioned their Cloudbreak site with a stated nameplate capacity of 45 mtpa. They expected optimisation projects to increase nameplate capacity to their run rate to 55 mtpa in the same year.
      Here we now are in 2011 and they have just hit 40 mtpa. While many analysts seem excited about FMG’s expansion plans I cant get enthused. The term demonstrated capability comes to mind.

    • Hi Grant,

      Great post in my view,

      Good insights on how analyst forecasts are developed.

      This country hick likes under promise and over deliver

      Gives another layer on the MOS

      • Thanks, Ash – I only buy companies with sound finances, a competitive advantage and a good MOS – enables me to sleep better at night (and during the day!)

  26. Any thoughts from the room on the implications of the changes in the Forge management structure. From an outside viewpoint, it looks like Clough are flexing their muscles.

    Will these changes undermine Forge’s capability or effectiveness?

  27. I know this is totally unrelated, but could someone please give an opinion on RCG Group, especially any forecasted values and their general opinion on company. Thanks

    • Hi Roger/ Deb.
      Briefly only: I value RCG at 0.48c, so in my opinion expensive, a few other points, retail is doing it tough, and their Merrill shoe distribution I would worry about, I think Merrill make fantastic shoes I confess to owning 4 pairs, but they are available on line at half the price you pay in Australia, and postage is not expensive.
      I purchased my shoes locally but I know a lot of people who purchased in the USA. ( My thoughts only

      • Thanks William for your thoughts, being a bit of Merrill fan myself and liking the Athletes foot concept, I thought it was an interesting company.

        I agree that retail is definitely suffering at the moment and the strong AUS dollar isn’t helping, being in retail myself our customers can actually buy product on the net from US cheaper than what we can buy it wholesale from Aus distributors (no it isn’t books!). People blame the retailers for being greedy but I think people need to look at wholesalers.

        If that’s the case is it worth looking at any retail stocks at the minute?

  28. A little quote i read about Crown in an interview with James Packer for the Australian. Thought it gave a few good hints as to what type of business it is.

    “Crown is not a company looking to issue fresh equity and we are already spending more than our profits on our capital expenditure program. That means there is a limit to what you can do.”

    “We as a company got a shock, like a lot of companies did, during the GFC. I was lucky enough not to get diluted through that process. In fact, I have a higher percentage of the company now than I did before the GFC,” Mr Packer said.

    I think there are two strong messages in these two quotes and back up my decision to get out of it and not to get back into them.

  29. I’m taking the following bets:
    Newscorp will make a bid for Carsales in 2011
    Fairfax will do a capital raising by end 2012
    Contact me for the latest odds

    • Sorry Bradley, quit gambling after I read Value-able !

      ps. my friends want to know the odds? lol.


  30. I bought an iPad – anyone in the investment business, in the words of Molly Meldrum, “do your self a favour” go out and get one fantastic for reading annual reports

    • Hi Brad,

      A depreciable tax deduction at worst for the valuable community

      Good stuff

      I hope you bought that one at JB.

      I will be mighty cranky with you if you didn’t


  31. I believe Buffett’s definition of risk maybe of assistance in determining when to sell. He has stated that he thinks of risk as “the permanent loss of capital”. We often equate this with buying a share but not selling.

    But if you have utilised the value investing principles appropriately, and a share reaches its intrinsic value, then you should still be looking a suitable return if you decide to sell – a share well bought is already half sold (Munger I think).

    If you are in a position of buying MCE or some other share at a large discount then it is somewhat of a luxury to contemplate when to sell. Even if the price goes past intrinsic value and then heads back toward it and then you decide to sell, then you still should be looking at a suitable return – no permanent loss of capital here.

    If the intrinsic value is rising at a good clip then there is no need to consider selling. If it is only projecting an average future increase then there maybe other shares that represent better value and thus you can sell, take profits and reinvest in other opportunities – still no permanent loss of capital.

    Even in a “worse case scenario, you should only be thinking of selling if it is at its intrinsic value and shows signs of slowing or where a better opportunity arises. You may regret when the share rises past its intrinsic value (and you believe you are forgoing more profits), but we know that price follows value and the share will find its way back to intrinsic value if it has past it. This is the really important part of Roger’s valuation methodology. You can calculate future values and then determine whether to stay the course or jump ship and find a new boat to row.

    Buffett and other value investors have been able to take profits and compound them by selling when better opportunities arise.

    By way of a personal example, I bought some undervalued shares at $3 in April 2009 and then sold at $9.50 just 12 months later. Then I watched it go above $15 in the following 6 or 9 months. I complained to my wife that I was an idiot but she reminded me I had reinvested the profits into another share at $3.00 which is currently at around $9.00.

    We may sell “early” and miss some profits but the reality is that over a whole portfolio your “missed” profit may only be a very small portion of your portfolio’s value.

    Under any of these scenarios, there is little regret and no permanent loss of capital.

  32. Hello Roger/Room/Lloyd

    I was looking through the blog yesterday and I noted a post by Lloyd providing his updated IVs for Decmil and MLD. Today, I cannot find it anywhere, despite going back through all the blogs in March/Feb.

    Could anyone please point me in the right drection?

    Regards, and thanks

  33. Hi All

    Could someone please guide me through RMS calculation im still not clear how to calculate intrinsic value using just the 1 table(11.2 ) …sorry about this basic question


    • If you have a company that retains all its profits then you would have a 0% POR so the income amount would be $0.00 and the growth amount $x.xx for the retained earnings part. There for $0.00 + $X.XX= $X.XX for the IV.

      As the formula Roger teaches is two amounts added together, if you get zero for one than the IV is the other amount. Works the other way around with a company that pays 100% out.

      Hope this helps.

    • Peter Kruckow

      Hi John
      If you are only using Table 2 , that must mean the POR is zero. In that case just multiply the eqps by the multiplier in Table 2. Was going to look it up but only got as far as seeing what they do then left it there. I think you’ll find more teeth in a hen,s mouth than you’ll find people on this blog spending time researching an explorer. I’m only new to this as well, but in the 5-6 months I’ve learnt that it’s more like speculating than value investing as far as explorers go
      Hope this helps


    • Hi John

      RMS (Ramelius) is an excellent gold miner with great growth potential. I have their IV as follows:

      2010 – $1.42 based on annual report
      2011 – $2.46

      Inputs for 2010 are:
      NPAT $20.20
      Dividends $0.00
      Opening Equity $56.10
      Closing Equity $110.34
      Equity/share $0.38
      ROE 24.3%
      ROE used by me 25%
      Payout ratio 0.00%
      Shares on issue 291.342
      Required rate 12%
      Table 1 figure 2.083
      Table 2 figure 3.748

      I have been conservative in regards to 2011 NPAT estimates as I have based it on $43.71m or $0.15 EPS. If you look at the Dec 2010 result you will see they have earned $0.118 EPS so to hit my estimate of $0.15 EPS for the full year should be very easy for them especially considering their ramp up in production.

      My dividend estimate is $0.02. ROE is 33.8% so I have used 30% and payout ratio is 13.3%. Shares on issue have increased to 291.42 at 31/12.
      IV for 2011 is $2.46.

      I continue to buy shares in the company

      • I get somewhat different results – how do the following look to you?:

        Code: RMS Price: 1.36

        ……….. EqPS .. Shares … DPS … EPS … RR
        Next Yr … 0.51 .. 291.42 … 0.020 .. 0.150 .. 12
        Curr Yr … 0.38 .. 291.34 … 0.000 .. 0.069 .. 12
        Prior Yr … 0.19 .. 291.34

        ………….. IV .. .. ROE . NPAT .. POR
        Next Yr … 3.07 … 34 .. 43.713 .. 13%
        Curr Yr … 1.32 …. 24 .. 20.102 .. 0%

      • Justin,

        The diluted EPS in the half-year results was 11.1c. You have EPS for the full year at 15c. Given the average sale per unit is likely to be higher in this half and that they are consistently increasing production, I’d guess that EPS for 2011 will be higher than $0.22.

        Perhaps it is my suspicious nature, however I find it strange that a ~$400m market cap company has no analyst coverage. They had one previously, but the eps forecasts have been removed. If were a guessing man, I’d be thinking that there is some big money moving into this company and trying to do so without rocking the price too much.

        I use a 14% RR, but the IV i’m getting is higher due to the difference in assumed earnings.

      • I have had a look at RMS. Their exploration costs (which are listed as an asset) significantly increased (1000%). Without this in the equation, asset value has actually dropped for the period. I am certainly no expert so would value the views of others well versed in mining stocks as to whether this is normal in a growth phase. Additionally, I’m interested to get others views on what they see the competitive advantage is? I have always found this a little difficult to decipher when looking at exploration/mining companies. Appreciate your thoughts.

      • Hi David V,
        Firstly David, thanks for the post because in investigating it it’s given me a better understanding of that side of their reports. I should also declare I hold Ramelius.
        I will admit I’m not well versed in mining stocks (have an excellent broker who is). I will continue to hold because this is an exceptional business, run exceptionally well.
        The company bought 100% of Mt Magnet lease tenements for $40m and paid shareholders a capital return of $14.56m. They also paid dividends of $5.83m. This was totally funded from cash on hand. They have no debt. After all this their cash position changed by about $5m.
        Now to the assets you refer to. I’ll be clumsy here because I’m not an accountant. From their notes in their annual reports this figure represents, “Exploration, evaluation and development expenditure and is accumulated in respect of each identifiable area of interest”. The note is rather comprehensive and include costs of restoration over the life of the site.
        When production begins this figure is transferred to “Development Assets” and then is amortised over the life of the mine according to the rate of depletion of the economically recoverable reserves.
        This may sound confusing especially the way I explain it but when you think about it, it makes good sense.
        Layman’s terms the way I understand it and please Ash or another accountant feel free to clarify.
        When they pay $40m for tenement leases they like to have an asset to show on the books. So they calculate everything they can think of including environmental, restoration and rehabilitation costs and bundle it under this heading. Then as the mine starts to produce they deplete the asset just as the gold in the ground is being depleted.
        $40m is a serious investment and it’s important that the progress of that investment is reported accurately. Doing it this way, write offs are attributed individually to each of these assets.
        This business has great cashflow.
        I hope this post is halfway intelligible.

      • Thanks Rob,

        I appreciate your response.

        The follow on question on this (for me as a mining layman) is to understand how they derive the asset value. Is it simply equal to the purchase price + exploration costs, or is there another method for deriving this? The reason I ask is that to me (based on the above method for valuing the asset), this type of asset is not disimlar to goodwill, in that there is an assumption that the price paid equals the ‘unknown’ value of the asset. I am sure that in many occasions that the value extrapolated from a resource is significantly higher than the original purchase price, but if the value extrapolated is lower e.g. extracting the mineral is not commercially viable, then does this increase the risk of a write-off on the balance sheet? If so, how do graduates treat this risk? By increasing RR?

      • As I mentioned recently, you do not make a bad investment ‘safe’ by raising the RR.

        Believe it or not David, while my valuation of a mining exploration company that loses money, is zero or even negative, there is a value attributable to such ventures.
        Its the present value of the the resource, weighted for probability of finding it.

        Mining (producing) companies have real assets (the mine itself). They also have positive cash flow so I can put a value on these. I even own one. A mining explorer is trickier.

        Without assets or cash flow there is only the management, some cash that has been raised and a powerpoint presentation.

        Pretty quickly the cash will be burnt and the powerpoint presentation will be useless if nothing is found, so that leaves a bet on management and some probability of finding something. If its near an established resource, the probability is higher but still not certain.

        With explorers you are betting on two certainties. 1) they will run out of money and need more and 2) they are unlikely to find anything, let alone take an exploration lease and graduate to a mining lease and then profitable production.

        Of course the low probability of success, usually means prices are low and so, any good news can hurtle the shares forward. The sniff of a ‘find’ or even a stock broker ‘initiating coverage’ can cause the share prices to sky rocket. A speculative example is Hot Chile (HCH) a broker initiated coverage this week.

        I am not known for speculating, indeed I will be the first to admit that I am terrible at it but a good friend of mine is very good at it and he has always put me onto the winner at the Melbourne Cup! Sound familiar? Its the only time of year I even know the name of a horse. He suggested Hot Chilli some time ago and out of a sense of obligation (I had ignored all of his previous suggestions), I purchased a few shares, that I still own. I can confess to not enjoying the volatility at all because I have no certainty of the value and while I am delighted with the positive impact on my account, I do not share my friend’s optimism for its sustainability not his appetite for the risks. In anticipation of this response of course the allocation of capital to such a venture is appropriately small. WIll I do it again? Probably.

      • The way I look at companies such as Ramelius is firstly to look at their valuation and MOS. Therefore I’m not looking at pure explorers, I want earnings and good cash flow.

        I’m looking for companies that mine certain commodities that I feel are either safe at current prices and are likely to be increasing. This gives me a lot of comfort. Gold works for me right now. I believe that commodities can be viewed the same as an industrial company as to whether they have increasing prices of their goods or decreasing prices. Can someone else start a mine next door and erode margins like iron ore?

        Management is extremely important. If they are not constantly hitting their targets and expanding their resource base it is probably due to ineffective management. Ramelius has good management. One of the shareholders is Sprott Asset Management and they know their way around this area. If they have met existing targets and have plans to grow resources then it gives me a lot of faith that they can achieve it.

        Another area to look at is the cost per resource. The lower the cost then the higher margin and the safer it is. Ramelius is one of the lower cost gold miners in Australia. Medusa is even lower at $190 per ounce but it operates in the Philippines. Sometimes costs are higher initially but they can drop rapidly – if they are not then I would be concerned.

        One measure for comparison is the price per resource and there often are comparisons available and this can highlight relative value.

        Clearly no or little debt is highly desirable and almost a must have.

        I have no personal preference between mining and industrial companies. I think they work in cycles and certain mining companies work the most for me with the inflationary environment that I believe we are heading into as they benefit from it as opposed to having a margin squeeze.

        Competitive advantage in my view lies in the management, their assets, cost of production and ability to successfully grow without making expensive acquisitions or with the use of debt.

      • Hi David,

        In terms of accounting on asset value, accountants are still very cost focus. That is, the cost incurred is the amount being capitalised as asset (ignoring make good provision for now). As you pointed out, there is a disconnect between accounting asset vs economic asset.

        Accountants are not ‘interested’ in determining the economic worth of an asset, instead, they just need to decide whether cash spend should be expensed or capitalised as an asset. (or as I have been told: “what the other side of the journal entry”)

        That said, there’s been a recent shift away from cost accounting towards fair value accounting, but I won’t bored you with the details.

        Thinking of such assets as goodwill is not a bad place to start. If the company can continue to generate high ROE and high ROA, then it does suggest that the risks of write-off are lower.

        Just my thoughts.

      • Hi David and Joab (and others interested in economic v accounting goodwill),

        Accounting goodwill is very different to economic goodwill. That is clear. Economic goodwill is usually not reflected on the balance, hence high rates of return on equity. Accounting goodwill has the opposite effect on return on equity. A busness with high economic goodwill will have a high ROE and an even higher retirn on net tangible assets. It suggests the business has something of great economic value but it is not on the balance sheet. Just because accountants don’t give it a name or a figure, doesn’t mean it ceases to exist.

        Fairfax for example, produces low single-digit ROEs. A low ROE suggests a high asset value on the balance sheet. When the one of the biggest assets is goodwill, it may be worth questioning its carrying value. Fairfax generates a 5.7% return on equity. Last year’s profit was about the same as 2004 but contributed equity has risen from $1.1 billion in 2004 to $4.7 billion last year. Is an asset of $2bln called goodwill reasonable? The auditors’ test for impairment must change.

        Thanks for your clarifications and contributions Joab, the blog is richer for it. I am sure many others would agree they are becoming better investors because of the time you take to share your expertise.

      • Hi Rob,
        Hi Rob

        No clarification needed that is an excellent Job.

        The major problems in this area comes from the fact that accountants and auditors are not geologists so the rate of depletion or in fact if their is anything to deplete is hard to determine and reliance on management is critial.

        The result of this is that the accuracy of the figure will largely depend on the integrity of management.

        I also hope this is clear

      • Sorry guy’s I stand corrected. ASX still has them listed as a gold explorer.
        My apologies


      • Thanks Steve, I plugged in an EPS for next year of 24c and get the following:

        Code: RMS
        Price: 1.39

        ……….. EqPS .. Shares … DPS … EPS … RR
        Next Yr … 0.60 .. 291.42 … 0.020 .. 0.240 .. 14
        Curr Yr … 0.38 .. 291.34 … 0.000 .. 0.069 .. 14
        Prior Yr … 0.19 .. 291.34

        ………….. IV .. .. ROE . NPAT .. POR
        Next Yr … 5.42 … 49 .. 69.941 .. 8%
        Curr Yr … 1.00 …. 24 .. 20.200 .. 0%

        And with an RR of 12:

        Code: RMS
        Price: 1.39

        ……….. EqPS .. Shares … DPS … EPS … RR
        Next Yr … 0.60 .. 291.42 … 0.020 .. 0.240 .. 12
        Curr Yr … 0.38 .. 291.34 … 0.000 .. 0.069 .. 12
        Prior Yr … 0.19 .. 291.34

        ………….. IV .. .. ROE . NPAT .. POR
        Next Yr … 7.13 … 49 .. 69.941 .. 8%
        Curr Yr … 1.32 …. 24 .. 20.200 .. 0%

  34. Hi All,

    I think we need to consider another point that Roger raises in his book – do not expect to beat the market all the time.

    When I read the posts on this blog I often get a feeling that unless one can find an opportunity to buy a stock at MOS 50+ and see one’s money double in a year or so it is not worth getting out of bed.

    How many of those opportunities are out there? Are we counting on a GFC or a new MCE or TRS $1 float every couple of ears?

    I believe Warren Buffet said that it is better to buy a great business at a fair price than a mediocre one for a good price.

    I only recently bought MCE with a reasonable MOS and while I don’t expect it to double my money, I think it will do better than a term deposit. If I find a better opportunity, I will take it.

    Surely the fact that MCE is no longer available at a huge discount is not a reason to start thinking about selling it, especially since most folks here believe it’s such a stellar business with great prospects – a definition of A1. Am I missing something, Guys?


    • Its not good to ahead of oneself. However there are opportunities abound so I suppose it depends on your own personal RR.

    • I don’t want a MOS of 50+ (would happily take it any day of the week though) but depending on the company i would like at a minimum at least 20%. Otherwise, i might just go and have a nap and wait.

      I am extremley patient and it can be easy to be patient in a warm comfy bed.

  35. How to value a company that has a high ROE, but low equity ?. These companies find it easier to pound out high ROE year after year, but some of these have reducing equity per share. ORL is an example. In 2004 it had a ROE of 20 %, but book value of 1 $. in 2010, it had a ROE of 80 %, but book value has fallen to 0.70 $. Surely it is easy for such companies to get high IV based on the formula, even though book value has fallen.

    Even a company like Aristocrat has had rising ROE with falling book value, until the EPS fell off a cliff then ROE returned to more “normal” levels. I guess I am saying a company can have great ROE and even rising ROE if its book value has fallen, like ORL.

    Should not a rising book value be just as important in any calculation based on ROE ?. I have shares in a retailer in the US, Aeropostale, which has just started moving out of the US. I have an IV for this company based on Roger’s formula off about 4x its current share price. But in this case this company not only has ROE around 50 %, but also a book value that has increased by about 10 x in 10 years, WITH nil debt. Surely a company that increased ROE without an increase in book value should not be praised as having done great things ?.

    • Thank you for your blog, an other item I should consider.
      I have copied your comments and pasted it in my book [VA]

    • It all depends on the quality of book value. If a company has large amounts of intangible assets, e.g. Primary Health Care & Toll Holdings, its possible they may have to write down the value of those assets at some future date, which will cause book value per share to fall, and funnily enough, ROE to rise. Likewise, tangible assets may be accounted for at purchase cost, market value or some “future worth” depending on the company and the type of assets. Look at Timbercorp and Great Southern, loads of assets, but in a firesale the assets were worth much less than they were accounted for on the balance sheet.

      Remember that book value is an accounting item, so it can be fudged, manipulated, so should only be used as a guide. Calculating intrinsic value using ROE and book value is only one half of the puzzle (and it could be right or wrong). Competitive advantage, growth prospects, strength of management and outlook for the sector are some other factors you need to consider.


      • Thanks Mike,

        I have a few rough rule with regards to intangibles.

        1) If ROC is greater than 20% then don’t even look at them as they are probably higher than that which is stated in the balance sheet.
        2) If ROC is less than 20% then go have a look at the intangibles.
        3) If ROC is less than 7.5% than the Intangibles are a pure fantasy.

        Just a rough guide that I like using and I hope it helps others

      • Also that share prices eventually revert to their intrinsic value and not necessarily their book value.

  36. Great post Roger,

    In my view, Chapter 13 is one of the reasons that your book is a clear stand-out in the market. Some great, logical ideas that I’ve learned must to be considered before arriving at any sell decision – like the buy decision, lots of thought/research should also go into a potential sell decision.

    I agree in australia that companies with a buy and hold forever approach i.e true competitive advantage & performance are rare, so patience is key. Looking overseas offers more possibilities. Not sure what the IV is for Mastercard, but this is 1 example of a company that delivers consistent high ROE (30-35%), operates in a world market duopoly (huge competitive advantage) and also shares no credit risk, as that is owned by the banks. Must be great to have a business model where you act like a cash collector and the only real threat is a steep decline in electronic transactions (highly unlikely, especially in emerging non-mature markets. While based in the U.S, most of Mastercard’s revenue is from Overseas activity).

    Thanks again for highlighting the importance of C13.

    My No.1 sell trigger would be that IV 1 year out has either levelled-off or (worse) reduced from current IV and there are better options to deploy funds elesewhere.



  37. Hi,

    I’ve been thinking about required returns and formulating a system that i’m comfortable with and would allow me to treat companies in a consistent manner. My concern was that for some companies I used 10-11% RR simply because they were “big” and/or “popular” and higher rates for others because I didn’t know much about them (oh dear, you say!).

    Considering that RR is perhaps the most subjective part of valuing a company and there’s also not a great deal of discussion about it, I thought I’d throw this out there.

    My initial system is as follows, assume a company’s sector has a certain risk that I’ll assign an initial RR. Then adjust the RR down according to company specifics relating to competitive advantages. I decided to not adjust RR up, if I get a “dodgy” sense from management or there’s some additional risk to a particular company, no adjustment of RR can cater for that and it won’t get my money.

    So; I initially started with a bunch of sectors and assigned a RR to each. I then realised it mostly boiled down to..
    Anything resource/energy/property related gets a 14% required return. The rest, get an initial 12%.

    For each company I’ve looked at, I then noted up to 2 points that might reduce the RR. For some popular A1/A2 the result was:

    DTL + SEK, 12% – 1 for recognised superior products = 11%
    WBC, 12% -1 for being a big 4 -1 for brand/$ equity = 10%
    MCE, energy, 14% – 1 for technology R&D = 13% RR
    BKL, 12% – 1 for recognised superior products = 11%
    CRZ, 12% -1 for network effect = 11%
    PTM, 12% – 1 for recognised superior products via management = 11%
    KCN, 14%
    JBH, 12% – 1 for network effect = 11%
    MND + MIN + FWD, 12% (couldn’t really identify an advantage to justify reduction of 1% to RR)

    Am I on the right track with these return rates?

    Which leaves 10% RR company list including big 4 banks, WOW, COH, CSL, CCL.

    Sorry for the long-winded post, but I wanted to share what I had done, and learn from people’s thoughts on this or if anyone else has a system but has a totally different process? If nothing else, looking methodically at each company has been a valuable process.

    Cheers, Deb

    • “If nothing else, looking methodically at each company has been a valuable process.” and actually putting it into black and white and then having it right beside the other company info.

      • Deb

        Yeah I agree, your methodology has good merit.
        I tend to work slightly differently. I start out at 10% and then look for risks and add premiums to the RR based on the risks. The net result may be quite similar.
        I think RR of 14% is quite high for A1 companies even if they are resource stocks.
        I tend to use 14% for newly listed companies with market cap of less than 200 mil.

        The other thing to note is that we are in a volatile but relatively flat market. What happens if we enter a 3 or 4 year bull market. If you haven’t positioned yourself early in the uptrend you may find it hard to get in even at conservative RR.

        I am still learning so Its good to hear from others as well.


      • Maybe slightly arbitrary.

        MND, MIN & FWD are resource related. MCE is leveraged to oil prices. What about financials, or other cyclicals eg – PTM?

        Financial economists (aka the boffins) have been arguing about the required rate of return on equity for a long time.

        I think the question you should be asking might be: “how volatile is the ROE likely to be going forward?”, OR

        “What is the rate of return would compensate me for bearing the risk of a permanent loss of capital?”



    • Just a thought, I believe Roger mentioned during the SMSF seminar last week:
      You are not making an investment any safer by raising the require rate of return, especially if you are uncertain about the future of a company.

      • Joab,
        Totally agree! Hence the idea of formalising how I determine RR.

        Could you explain a little more?

      • Hi Deb

        There are a few other things I like to consider and I will point out two more which I consider

        The first is the liquidity of the stock, generally we want to buy a great business at a big discount and hold it forever or until the market becomes irrational on the upside but we are all human and make mistakes so if I make a mistake I want to know how easy it is to rectify the mistake. Therefore, a less liquid stock has a higher RR. For example, I really like DTL but it is not very liquid so it gets a minus 1 for how they are doing things but a plus one for liquidity.

        The second thing is predictability of earnings the easier it is to predict the earnings the lower the RR. WOW’s earning will increase between 4% to 11 %( maybe) for the next 20 years. Very predictable. However, Bank earnings will do this in the good times but will totally tank in the bad times. We have not had a recession in Australia for a very long time but it is inevitable that one will come at some stage in the future. The GFC showed that we cannot defeat the economic cycle. When Australia goes into recession the Banks will make losses and big ones. I just don’t know when this will happen. Maybe next year maybe in 20 years time but I put a higher RR on the Banks than say WOW because of this fact.

        Just a few other things to consider and I hope this helps

      • Hi Ash

        RE: liquidity

        I have heard the term, but could you provide your thoughts on what defines a “liquid” stock?

      • Hi Matt

        The liquidity of a stock refers to the number and quantity of trades in a stock per day.

        EG BHP has many more units traded per day than MCE and MCE has many more units traded than say KKN.

        Therefore BHP is more liquid than MCE and MCE is more liquid than KKN.

        I hope I have explained this well

      • Hi Ash
        re KKN
        maybe a Freudian slip, or are you, looking at buying Kirkenes (Norway) airport IATA code
        Warmest wishes

      • No worries, I am just trying to emphasize the objective of this exercise (not just to you Deb, but to those reading your post).

        Value.able page 191 & 192 discussed about RR. To summarise, it’s a function of 3 components which includes ‘equity risk premium’ (Roger explains it as the compensation for risk).

        I would also refer to Buffett’s letters to shareholders which he ‘defines risk, using dictionary terms, as “the possibility of loss or injury”‘. Buffett further explains that the world of finance like to define investment “risk” as relative volatility (or ‘uncertainty’) of a stock which he think this definition is off the mark.

        Putting it together, RR used for each company differs as a result of your risk assessment for that company and your risk assessment should be designed to critically consider the “possibility of loss”. Hence, the higher the risk, the higher the RR (or compensation for the risk).

        For what it’s worth, I think you are on the right track. The point is you have a system that you are comfortable with.

        If I can suggest a broader view, good quality businesses naturally reduces your risk. How you measure good quality is the art.

        And remember, it is better to be approximately right than precisely wrong.

        Hope that helps.

      • just thought i would add my thoughts, as everyone likes a good RR discussion (i think). As mentioned Deb, you have a good logical system which means you can apply it on a consistent basis so pelase don’t take this as a critique of your system, it is not and i think it makes sense. If your happy with it then that is all that matters.

        My arrival at an appropriate RR for an investment takes in very little to do with the actual company and focuses more of the uncontrollable risks in its market.

        I’m a company first/valuation last investor. A company needs to demonstrate to be a great company to me before i consider to work out the value.

        So that part of the assessment (finances/competitive advantage etc) has already been done before the valuation and i am pretty picky as to what company i want to be part of.

        My RR is determined by looking at the external non-controllable threats that will affect its earnings.

        This could be its reliance on specific markets, currencies, weather, customer sentiment, future demand for its product, level of control by governments, barriers to entry, existing competition, the ability to differentiate in the marketplace from competitors (is it in a commodity industry where only price matters) etc.

        The above is then compared with my own understanding of the industry.

        An example i give is that John and Bob have the safest house that could ever be built, John puts his house in a safe average suburb but Bob puts it on a volcano. You will want a higher insurance premium to insure Bobs house as even though it is the safest in the world, it is still on a volcano.

      • Andrew,

        Thanks for taking the time to reply. It was with some trepidation when I posted and to get these responses has been a real treat. The themes of predictability/stability has been clear.

        And thanks for reminding me of that analogy!

      • I think the same way that Andrew does – I would just add that I also consider my alternatives. If I could find a bond paying 10% I wouldn’t be using an RR of 10%. ie the value of riskier investments drop if low risk investment returns rise

      • I agree, Joab mentioned this as well. Roger mentions looking at RR as being components of (from memory) growth, real return, risk premium.

    • Nice post Deb, like Ashley my RR’s are a bit different but you have designed a logical approach to working out what RR to use that you are happy with and can use consistently.

    • I can’t for the life of me understand why so much effort goes into choosing a required return. Roger might say that increasing the RR doesn’t make an investment any safer, I’d say that tinkering with it confuses the process and makes it less likely that you will make a rational investment decision.

      As I understand it the RR is the discount rate or the default rate you would expect to get on your money if you did not take any investment action, plus a bit for inflation and the extra risk due to the nature of shares. Ben Graham reportedly used the US Treasury Bond rate.

      Given that there is no universally accepted definition of intrinsic value, about the best being, ‘any of the outcomes of the application of calculations that arrive directly at a dollar amount for the worth of a stock where the calculations are based on defensible rational logic using two sets of inputs,’ (John Price – The Conscious Investor), then there is no reason why we shouldn’t fix the RR in our definition of intrinsic value. In fact there are good reasons why we should.

      If you increase RR from 10% to 14% by how much does the intrinsic value reduce? The answer is 28.57% for a 100% PR and 45.43% for a 0% PR. What happens if you then put a 15% MOS on the share with a lower RR but higher PR against 30% MOS on a share with a higher RR but lower PR? I suggest most would not have a clue without calculating it out. I was always taught never to put margins on margins else you will never be sure exactly what margin you are really applying. One MOS at the end of the calculation only.

      I don’t believe that the relationship between RR and IV is obvious and hence the relationship between RR and MOS is equally as obscure. It follows that using different RR’s for shares to make investment choices becomes impossible if you don’t understand the impacts of the RR’s on the MOS. The only way to realistically compare share A to share B is when the same RR has been used for both.

      Looking back over the postings of the past several months then a huge amount of time seems to have been spent by bloggers trying to compare IV calculations that differ because different RR’s have been used. If everybody used the same RR then the effort could be concentrated on the quality of the company and the appropriate MOS to apply. Isn’t MOS where risk should properly be factored in rather than tampering with the return you expect from a share investment?

      What would be wrong with defining IV as the value calculated by the method set out in Value-able to meet a return of 10% – or any other value chosen by Roger or consensus? The tables could be collapsed to a single column, bloggers would generally agree on IV results and a consistent means of comparison would have been established leaving the only outstanding questions of, ‘how much would I be prepared to pay?”, and “at what price would I sell?”

    • Easy Ann,

      Just turn the market off.

      IV will not change with market movement

      Hope this helps

  38. Hi Roger & Ash,

    would luv to hear your thoughts on Thorn, based on their latest announcement ,they have forecasted a NPAT of 22-23 mil for FY11, which gives them an ROE of 24.5%, I have their IV at about $2.40 (RR of 11% – which maybe a bit generous), the current price is at a 20% discount to this FY11 IV. They have just announced a cost accreditive purchase for FY12 which is a good fit and will help boost their future earnings and growth . Have I missed anything obvious here? given the recent news any ideas on the FY12 IV which will begin next month?


    • The other thing to be aware of is that their debt is increasing (to 30% of equity) which increases the risk profile of the company a bit. They are planning to reduce that by a capital raising some time in the next 12 months. No details on this as yet that I have seen but there is the potential that it may have a diluting effect.

      Their existing Radio Rentals business is obviously performing strongly. I own TGA, but haven’t yet come to a conclusion in my mind as to what this all means.

      • Their debt is easily servicable. Why on earth would they do a capital raising? Is this your predication or do you have a link of where they say this??

      • I believe (please check) an equity raising “later in the year” was foreshadowed in the asx announcement where they announced the purchase

      • I agree, the debt at 30% s/b easily serviceable. However, TGA are verry conservative with debt levels and have maintained a low debt/equity ratio that I believe they will want to re-establish. They held up well during the GFC with very little increase in bad debt levels. Hence projected cap raising….downside will be the diluting effect. I’ve held this company for some time and have enjoyed the ride. I’m happy to stay with them through this. My I/V seems a bit high relative to other’s calculations. I see I/V at 2.17 versus under $2 by most.

    • Hi, Paul,

      I like TGA

      I have them at about IV,

      The time to buy this one was 12 Months ago when at a nice disount.

      Unfortunatley, I dithered and did not pull the trigger.

      IV is not doing much in the near future so we need this one at a BIG discount

    • TGA’s incremental return on equity since its listing has been well in excess of its ROE which has been rising towards this higher incremental return. Whilst I have a large MOS on TGA, I’m allocating capital elsewhere as the Labor Government has mentioned through the media that it wants to regulate companies that are charging high effective rates of interest to their customers who are unaware of the real cost to them. TGA and CCV are in this boat. If unfavourable regulation is introduced, my IV calculations are too high as they assume current business operating conditions will continue in the future. Labor likes to regulate so it’s enough of a big picture risk for me to stay away from TGA at the moment but if you hold TGA, watch out for any changes in consumer credit legislation that will impact on IV.

      • Michael Horn

        Tighter credit regulation would probably help TGA, because it is a disciplined company with good ties to Government agencies like Centrelink, and tighter regulations would constrain TGA’s less disciplined and less principled competitors. I recall reading in a TGA announcement that it was the first company in Australia to be certified as complying with these regulations.

  39. Thanks a lot Roger for this article on SELL. Finally, I did manage to get my Value.able back from my mate after a two month long wait ! But I had already taken part profits on my MND holdings and reading Chapter 13 now is re-assuring that my decision wasn’t a very bad one and as you say “One signal to sell any share is when the share prices rise well above intrinsic value.”

    My 2013 IV calculation for MND is $14.57 and when I took part profits it was trading close to $22.00, therefore in 2011 it is trading at 50% more than my 2013 IV estimate. I guess I am still in it to keep enjoying the ride ahead but at the same time I have the peace of mind that in case Mr Market decides to balance this out in the future I have already secured a sale at a good price.Not complaining at all after making a 65% profit on my investment in about 15 months time !

    thanks as always

  40. Simon Anthony

    These words which I have memorized from Buffett’s mentor, Benjamin Graham, and I suggest you do the same: “An investment operation is one which, upon thorough analysis, promises SAFETY OF PRINCIPAL and an ADEQUATE return. Operations not meeting these requirements are speculative.”

  41. First time poster here. The sell decision for me is always the most challenging, mostly because I’m not practising the future IV exercise enough, and I find the long periods of ‘silence’ between relevant company information to be mildly agonising! Chapter 13 in my copy is well thumbed…

    • What values did you use? That’s close to mine for next year (added some separators):

      Code: MCE Price: 9.27

      ……….. EqPS .. Shares … DPS … EPS … RR
      Next Yr … 1.35 .. 70.00 … 0.070 .. 0.559 .. 10
      Curr Yr … 0.86 .. 70.00 … 0.040 .. 0.294 .. 10
      Prior Yr … 0.00 .. 64.00

      ………….. IV .. .. ROE . NPAT .. POR
      Next Yr … 23.02 … 51 .. 39.130 .. 13%
      Curr Yr … 24.21 …. 68 .. 20.580 .. 14%

  42. Having sold DTL @ $12 when I thought it was 20% above my IV and watching its continued rise makes one appreciate the difficulty of making a timely sell sell decision.
    Perhaps the traders approach of selling half and letting the rest “run” is a good compromise.

    • Hi Doug,

      I have been a fan on DTL and it is a brilliant company,

      I know buffet talks about ignoring macro stufff but I can’t do that so I have sold all my DTL….They are doing really well but some of there revenue come from grovernment jobs..My Macro view is that there is zero chance for the government to get a balance budget unless they make cuts.. The labor party via past policial situations seems determined to get to surplus or at least balanced budget(btw long term this is a good thing) this will involve spending cuts …….no other way to do it………these spemding cuts will hurt DTW……..but will hurt DWS more.

      Just my view so don’t get cranky :-)

  43. Let me reformat that, sadly what I see when I enter the data isn’t what appears after submission:

    Code: MCE Price: 9.27

    …….. EqPS Shares DPS EPS RR
    Next Yr 1.35 70.00 0.070 0.559 10
    Curr Yr 0.86 70.00 0.040 0.294 10
    Prior Yr 0.00 64.00

    …….. IV: ROE NPAT POR
    Next Yr 23.02 51 39.13 0.13
    Curr Yr 24.21 68 20.58 0.14

  44. Hi Roger (and everyone),

    Again, great post. I’m reminded of an interview where you said you continue to hold Fleetwood because the dividend yield was attractive enough for you to keep the stock even though it was trading above its current IV (this was some time ago and may have changed of course).
    Of the companies that I own, unless their IV’s are going backwards I continue to hold in the absence of any better ideas. For me that’s the biggest question. Why sell (and attract the attention of the tax man) unless you’ve got a better use for the money?

    I’m off to re-read Chapter 13.


    John A.

      • Good timing on the sell given what has happened since, Roger. Nice yield on your buy price during the depths of the GFC but a widening negative MOS increases the the risk over time with the tendancy for price to follow value.

    • Personally, when it comes to investments, I would much rather attract the attention of the tax man rather than have him feel sympathetic towards me. Obviously companies with continuing rises in value don’t fall under this but otherwise rule #1 “don’t lose money”.

  45. Using Roger’s formula my work gives the following:

    Code: MCE Price: 9.27

    EqPS Shares DPS EPS RR
    Next Yr 1.35 70.00 0.070 0.559 10
    Curr Yr 0.86 70.00 0.040 0.294 10
    Prior Yr 0.00 64.00

    Next Yr 23.02 51 39.13 0.13
    Curr Yr 24.21 68 20.58 0.14

    This seems too high (data from Etrade) – have I put any figures in the wrong places?

      • Hi Justin,

        RR is too low try using 14%

        Plus POR wont stay this low forever so you need to crank that up a bit I think

      • HI Ash

        When you say POR needs to be cranked up (I presume due to an unrealistic implied growth rate), does this mean adjusting the forecast DPS figure upwards? (POR=DPS/EPS). I say adjusting the DPS figure rather than the POR figure as the POR is not one of the input values when plugging in the figures. Cheers.

      • Hi Richie,

        Not sure how you work your formulea but if you adjust DPS then POR will change but just make sure your EQPS is the right figure as well.

        Hope this helps

      • Hi Roger, yes I’m new to valuing companies, did I put the Eqps in the wrong years?
        I get this when I do so, which at least looks more realistic:

        [B]Code: MCE …..Price: 9.27 [/B]

        [B]INPUT: [/B]
        [B]………… EqPS .. Shares … DPS … EPS … RR[/B]
        Next Yr .. 1.84 .. 70.00 … 0.070 .. 0.559 .. 10
        Curr Yr … 1.35 .. 70.00 … 0.040 .. 0.294 .. 10
        Prior Yr … 0.86 .. 64.00

        [B]OUTPUT: [/B]
        [B]…………. IV: …. ROE .. NPAT …. POR[/B]
        Next Yr .. 16.15 … 35 .. 39.13 .. 13%
        Curr Yr … 7.96 …. 28 .. 20.58 .. 14%

      • Oops sorry, wrong formatting , try again:

        Code: MCE Price: 9.27

        ……….. EqPS .. Shares … DPS … EPS … RR
        Next Yr … 1.84 .. 70.00 … 0.070 .. 0.559 .. 10
        Curr Yr … 1.35 .. 70.00 … 0.040 .. 0.294 .. 10
        Prior Yr … 0.86 .. 64.00

        ………….. IV .. .. ROE . NPAT .. POR
        Next Yr … 16.15 … 35 .. 39.130 .. 13%
        Curr Yr … 7.96 …. 28 .. 20.580 .. 14%

      • without validating any of the financials for current and next year and with the numbers provided the ROE for both years is calculated incorrectly, ie. too high, should be calculated as per below…

        ROE = NPAT / Equity (ie. Eqps x Shares)…


      • For me it looks like a couple of things. RR of 10% is too low, I use 12%. POR also looks too low. A more conservative approach would allow for an increase to say 30-40%.

      • Re my calcs:

        – I use ROE = NPAT / (BOY + EOY Equity)/2
        – I thought we were supposed to use a lower RR for A1 companies? I’m no expert though.
        – My POR is Dividends/NPAT (Dividends = DPS x #Shares). So to alter my POR I’d have to make up a new DPS figure? Or is there another way?

  46. Hi Roger
    A friend and I saw you speak at Pyrmont during the week. For those who couldn’t attend you missed a great day. Shame you did not record the event. I am sure many people would have been happy to support the flood victims by paying for an electronic version of the day. You give so much away for free when there are many of us would be more than happy to pay for the fantasic opportunities we get by visiting here.

    I bought a friend along who is a follower of the wiggly line. I was trying to encourage him to show some maturity and stop betting on up or down. I think your clear and logical explanations are starting to get through. You responded to a question saying you used to be a trader. We are all very thankful you stopped worshipping false idols.

    I am down a little at the moment with my Reject Shop shares. My wife laughs at me because she warned me not to buy them. She insists they sell landfill and I have no right to encourage them. My wiggly line friend and I were discussing you selling your Reject Shop shares and he asked why you did not ride them up with a “trailing stop loss”. Not sure if you allow that type of language on this site. Sorry.

    I imagine there are many reasons why you would not use this strategy depending on what you have earmarked for the proceeds. However, if the decision is only to get out and you have nowhere but cash to put the proceeds, it does seem like a reasonable strategy. For those thinking MCE may or may not be over then why not take the “I’m not sure” path and follow it up? I am very new at this and have some experience buying but zero experience selling. Hopefully I will have little need to learn.

    • Hi Luke S,

      My wife and yours sound like they have something in common. I don’t use trailing stops because I have yet to find one that doesn’t produce premature signals. Sure they will all get it right when the big one comes but they also stop you out early and frequently. I sold my TRS when I could ROE flattening out, thats all.

  47. Hello Guys

    First post, so please be kind.

    When you are estimating future IVs, and you are taking analyst consensus on EPS and DPS – do you apply that to the existing shares on issues for future years, or do you estimate future shares on issue(driven by known capital raisings or historcial DRP increases)?

    I guess ultimately, what I am asking is whether the EPS consensus is based on current shares on issue? It can play around with your vals, if you accept the EPS forecast on a larger number of shares.

    Trust that makes sense.


    • Great first post, Chris!

      You are correct in noting that analyst figures frequently fail to account for likely changes in the issued capital. Looking back at the company’s history will give you a clue. Something like ABC Learning was issuing shares constantly and I’m sure that if they had managed not to go under, they’d still be doing it today. You’d need to take that sort of behaviour into consideration (and probably stay away from most companies that are raising capital frequently anyway). Compare this to FPS for example, which had 34m shares on issue in 2003 and 32m shares on issue now. Big changes to the number of shares on issue for FPS would be unlikely so there is one less variable to worry about.

      The other thing to look at is the cashflow statements and consider the need for cash in the business. Does it generate enough cash to pay for the ongoing needs of the business and any future expansion plans? If the cash is looking skinny then further capital raisings could be on the cards and you can come up with some potential scenarios to plug into your workings.

    • I just leave them as being based on the previous years shares on issue, I then look at the implied growth to see if that seems correct.

      • I also have been keeping the shares the same in order to not second guess it. However a great way to avoid getting in to trouble in my opinion is to try and stick with stocks that have stable shares outstanding.

  48. “When the market values a company much more highly than its performance would warrant, it is time to reconsider your investment.”

    ORL anyone ?


    • I think the idea is to sell before the company announces to the market! ORL is a good retailer, but still a retailer. And they’re all hurting, badly.

      • Agreed. I mentioned this in the post regarding JB. I think most consumer discretionary businesses will get squeezed in an environment such as we are entering.

    • Interesting to see ORL start to fall a few days in advance of the profit announcement as well. I still hold ORL and they are currently around my IV.

  49. Hi everyone,

    i agree with Roger’s comments but i would like to share some of my thoughts on ‘when to sell’ from my experience of 8 years in the markets.

    First, i think it is important before deciding on which companies to buy to first consider the maximum exposure u wish to have for one particular company. if you decide to allocate no more than 10% of your portfolio to one company than if that company doubles or triples in price it will become a much larger part of your portfolio.

    in this case you may decide to sell some of your shares in that company in order to re balance your portfolio. in doing that you also gain the psychological benefit of realizing some profit and releasing capital so if the share price falls, first of all you are happy you sold at a high price and, you may also decide to top up again. on the other hand if the share price appreciates you still have some exposure.

    this is what i call a win-win situation. we all want to buy at the bottom and sell right at the top, but unfortunately it doesnt work this way. my strategy may help you soothe those emotions and help you smooth out the volatility of owning shares.

    Second, we all remember march 2009 where any company you owned got smashed! remember black swan events can come out of anywhere any time!

    in regards to matrix, even though i would love to see matrix back to $5 a share, if i don’t realize some of the gains made how will i be able to afford buying more??? not to mention the disappointment of knowing u could have sold some at $10….

    stick to the value.able method of buying companies but don’t forget to realize profits from time to time.

    As one person once told me:

    “Little fish are gold”

    Good luck in your investing journey. Ron.

    (p.s. i own A LOT of matrix shares which i bought around $4 and i will be re balancing my portfolio as the share price appreciates….)

    • Ron,

      Thanks for sharing. I’m guessing there are potentially some hard lessons for those of us with not as much experience (me!). A lot of portfolio management information focuses on allocation in terms of asset types such as cash, shares, property etc but doesn’t get into the nuts and bolts of share portfolio management. i.e. When two stocks were 20% of a portfolio combined but are now 40% it’s obviously time to balance but by how much, what are the other considerations, etc.

      Can you (or others) recommend good sources for further reading in this regard?

      thanks, Matt

      • Hi Matt.

        I’m not sure of other sources of information i can recommend but generally my strategy is to have 50-70% of my savings invested in shares and the rest in cash – just in case.

        property is a whole different ball game as the amounts required to purchase are very large usually require a large mortgage and its more of a lifestyle decision, tax deductions and so on.

        so if for example you had some money which you don’t need for the next 3-5 years and is not substantial enough to consider property, then you may decide to invest up to 70% into a selection of 5 to 10 A1 businesses with a large MOS.

        OR you could just give your money to Roger at Montinvest, and let him do all the hard work!! :-)

        PLEASE don’t take this as advice and you should seek your own personal independent financial advice.

        hope that helps.

      • Hi Matt,

        I assume you have read value.able so I would recommend you read the warren buffett’s letter’s to shareholders going back to 1977 on the Bershire Hathaway website.

        Once you have finished these I recommend rereading them.

        The combination of Roger’s book and these letters were invalue.able to me.

        I think Ron’s views are very good and I like them alot but I will not be selling my first best or second best thing to buy my 10th best one.

        Remember Mae West “too much of a good thing is wonderful.

        Hope this helps

      • Hi Matt,

        I agree fully with Ash.

        In fact, I just started re-reading The Essay of Warren Buffet and it has reinforced a lot of my thoughts on Value Investing.

        Time spend reading these are more well spent compared to sitting in front of screen refreshing shares prices (which I used to do).

      • i would just like to clarify that i never said to sell the first best in order to buy the 10th best. all i said is if one stock becomes a very big allocation of your portfolio because of its strong performance and its price has approached its IV very quickly (i.e MCE) it might be suitable to re balance your portfolio and sell some shares NOT all.

        With the proceeds you don’t go and buy the 10th best business, you just wait for the next A1 opportunity or even buy the same company again if it drops substantially in price.

        hope thats more clear.

      • Thanks Ron,

        Yes I know what you where saying and I like what you say very much.

        Matt was just getting uncomfortable with 40% of his portfolio in 2 stocks and thought it needed altering.

        We was just trying to point out that that may not be in his best interests.

        Just because something becomes a large part of your portfolio does not necessary mean a sell.

        As LLoyd says no need to diworsifiy

        Thanks for your comments Ron I really look forward to reading them

      • Thank-you for the replies, much appreciated. I’m currently working my way through Intelligent Investor. Next stop sounds like some WB letters.


      • i hope u dont mean the online subscription the [Name Withheld], as these guys are not very intelligent!

        They had timbercorp, great southern and sigma as strong buys prior to the GFC and during!!!!

      • No, the Ben Graham book. I do get a wry smirk on various recommendations nowadays though. .

  50. I recently read Fisher’s ‘Common Stocks and Uncommon Profits’, after I had already become a Value.Able graduate. It made me realise something that Roger did not include in chapter 13 (but I think he is trying to say now).

    If you have chosen a business that ‘ticks all the boxes’, the intrinsic value should continue to rise year after year. If something changes with the business, that may not be the case.

    If you have purchased shares in the business with a good margin of safety over current IV, you really shouldn’t sell unless something changes with the business.

    The fact is that Mr Market is a strange creature, and he will often price a share above its intrinsic value (in fact we are all aware that this is usually the case). So, should you sell when this happens? I say no. If you do, you are speculating that Mr Market will revert towards current intrinsic value (as opposed to future IV). If you have been diligent with your selection, the intrinsic value will rise and your speculation may cost you.

    Of course, if something changes with the business and you believe that the intrinsic value will no longer continue rising, that is the time to sell. That’s called investing.

    If you choose to sell because Mr Market is an overpaying imbecile, that is speculation (that the share price will drop).

    And we’re all investors, right?

      • Another sell signal occurs when a stock, or the market, or a commodity, is in a bubble. I recall Buffett saying he regrets not selling into the 2000 US market bubble. Bubbles are rare, but nevertheless it is useful to have a strategy to deal with them if and when a bubble occurs. After all, as Roger says, selling too soon can be costly.

        Assume we are only talking about companies that meet Rogers investment criteria. Even though you expect a company’s IV to continue to grow strongly, Mr Market can push the price up so far that NOT selling becomes speculating.

        Is there a reliable sell signal?

        I have yet to work out a reliable signal using a fixed margin over next year’s IV. Any ideas?

        For the time being, I suggest setting a “bubble PE” based on forecast earnings for next year. History tells us bubble PEs do not last. For R&D and internet based stocks (eg COH, SEK), I set a bubble PE of 40, regardless of how strong the company’s prospects. At the other end of the scale, for established miners and banks, I suggest a bubble PE of 25.

        Shiller’s market PE index (which uses historical earnings) is a useful guide on US market bubbles. The last Australian market bubble was in 1987 and was also well flagged.

  51. Hi Roger,

    I would just like to say to the room that your quote.

    “I like businesses at big discounts to IV and who’s IV is rising at a good clip” is pasted next to my Buffet quotes.

    I think it encaputures what a value investor sold be trying to do.

    As WB said value and growth Investing are joined at the hip.

    • Your passion and generosity never cease to amaze me Ashley. Words cannot describe my appreciation for your contribution to our Value.able community. Thank you.

      • Hi Ash,

        I love your posts. When Dabas picked you you up on a “spelling mistake” you descrribed it as a Freudian slip, and then managed to spell Freudian wrong.

        You crack me up Ash, thanks for so many informative posts, keep up the great work.

        All the best

        Scott T

      • This mutual admiration society stuff might best be left unpublished. Frankly, it’s nauseating.


      • Thanks John,

        I am delighted the book and blog has helped so many people. Its the results that matter John. Last year however was like shooting fish in a barrel. This year will be much tougher – it already is. It is not possible to always get it right and I am sure there will be a few clunkers. Your comments help keep me grounded and remind me that not everyone agrees. It is much better to be humble and open to differences of opinion than to be prideful and ignorant. I agree with you on that front. We’ll keep at it (the investing) though and of course you are free to go elsewhere for your investing ideas – there are thousands of ways to invest successfully. I would be delighted to hear your thoughts on investing and how you have achieved success and of course I wish you every success.

      • John did you get out of the wrong side of the bed.
        This is a blog, so how else can people provide possitive reinforcement. I very much appreciate the time devoted by the regulars on this blog in providing valuable opinions.

        If expressions of gratitute make you nauseate, then maybe it would be better for your health if you didnt visit the blog.

  52. Thanks for a great post Roger.

    I’ve used the recent crisis to regig my portfolio and realize a couple of gains as I found that I had opportunities that had significantly higher comparative value.

    It’s not that my holdings weren’t overvalued, it’s just that I don’t have unlimited capital and other opportunities were even better so I had to reweight. Whilst I hate paying tax on gains, if value smacks you in the face then it is time to act.

  53. Hi Roger,

    On 4 March John Posted about MCE

    “The futures so bright ….. we’ve gotta wear shades”

    I would have to agree.

    Roger you wanted some good source data regarding the company and industry and I have found the below website gives you some teasers on the industry


    You have to pay for their full data though

    I have also found this site has some pretty good articles


    Transocean (yes they are the ones with BP on the Gulf of Mexico disaster) are the world’s largest offshore drilling contractor and you can get an idea on their views on their website

    Lastly the company’s website has some analyst reports


    Despite the use of what my mother called shed language when we lived on a farm (that is PE ratios and DFC’s). I found the information in them about the company and the industry very enlightening.

    Once you do a bit of goggling you will realise the demand for offshore oil drilling will only increase over time.

    I can’t think of a better sector to be exposed to.

    MCE really are in a good space with nice competitive advantage.

    Andrew has written on this blog about one of the Keys to maintaining a competitive advantage is Innovation and I believe that is where MCE has to shine in the next 20 years but so far so good.

    Henderson will help with that when it eventually comes online.
    In the shorter time period what we are seeing at the moment is a massive demand for their product due to a shortage of investment in this area during the GFC, so the big ramp up may slow or even decline once this is all caught up.

    This may mean a year or two of tougher times for MCE in 3-5 years but longer term the future of the industry is assured.

    Just my view and hope it helps

    • Oh BTW I have MCE @ $13.50 for 2013 so a hold decision is easy.

      Given they keep suprising on the upside a sell opportunity will be harder to identify

      • Regarding MCE, I like the way you think Ash, good man.

        Also, I have ORL at $ 9.25, why all negativity?

      • ORL’s half year result was disappointing. I have steered clear. Same store sales were down. I agree with about a $7 valuation. Price is heading back to IV in my view.

      • Just curious Roger, on the Switzer interview on about 10 Feb this year, you mentioned that you had ORL trading at about a 11% discount to IV. At that time, it was trading around $9.00 odd, which if my maths is correct, put an IV of $10.00. Was this an error in their transcript of the interview? or are you saying that based on the accounts which came out the other day you have recalculated the IV downward?
        Disclosure I had ORL for a while but sold them the day before you discussed them on Switzer. Felt a bit of a dill because my calculations had an IV of $8.50 but put it down to my needing a greater MOS.

      • Hi Marion,

        Great question because its worth putting the answer on a recent post for new visitors to see. My valuations can and do change daily. Every input and every announcement can change my estimate of value and often does. At the time you refer to the share price was around $7 and yes, my valuation was higher. The valuation has moved lower but the growth rate remains. Please remember my warnings that I am under no obligation to keep you up to date with my valuations and I won’t. I can change my valuation at any time. I can buy and sell at any time and most importantly; valuing a company is NOT the same as predicting its share price. YOU MUST CONDUCT YOUR OWN RESEARCH AND BEFORE INVESTING IN THE SECURITY OF ANY COMPANY YOU MUST SEEK AND TAKE PERSONAL PROFESSIONAL ADVICE TO BE SATISFIED THAT YOUR COURSE OF ACTION IS APPROPRIATE FOR YOU.

      • It was above my IV as well, but not substantially. I still have current IV around $9- and 2012 around $9.50. In analysing the half year reports, it appeared that ROE had actually risen to 47% for the 1st half of the year (i.e. 94% p.a.). Have I mis-calculated this? I am happy for the amrket to deliver further opportunities in Valueable companies.

      • Hi David,

        Remember Santa only comes once a year.

        Doubling half year results for retailers may not be the best way to do it.

        Hope this helps

      • This question has come up quite a bit. Build a spreadsheet with HY01, FY01, HY02, FY02 etc across the top. FY01 minus HY01 equals 2ndHY01. Plotting the data this way gives a much clearer picture.

      • Paul Middleton

        Not sure on why the negativity Zoran. The company had a higher effective tax rate, and have invested for future growth, no crime there. It seems to me the market as usual is somewhat shortsighted, maybe concerned with ORL management putting an end to discounting because they don’t sell ‘stuff’ in the words of the CEO.

      • My valuation on MCE is $13.50 for 2012, although I’d be leaning towards a surprise to the upside given the momentum they have with revenue and the growth of their order book.

        However I have to admit that I have recently reduced my MCE position to fund another purchase.

  54. Hey Roger

    Slightly off the topic, but just wanted to say good work on changing the layout so that the most recent comments are at the top of the page – simple but very effective! Saves having to scroll all the way to the bottom of the page to read the latest comments.

    Back on topic, funny that you posted this at the same time I felt I needed to reread Chapter 13. I’ve got several stocks in my portfolio from my pre Value.able days that are trading around or above their intrinsic value and I was considering whether to sell or continue holding. Thank you.

  55. WHEN TO SELL all our A1’s

    Thanks for good article Roger. I will not be seller of good stocks even when IV passes the share price by few miserable percent.
    Value of a good company will deal with that in no time.



  56. Hi Roger
    I’m finding calculating future intrinics values one of my investing challenges. I really appreciated the exercises you gave the under graduates over the Christmas period (as did may others as reported on this blog) and the results as I used these to check where I may have made a mistake.

    I know you’re really busy but was wondering whether you’d consider providing a few exercises and answers for calculating future IV – (1-3 yrs) so I (and others) can feel more confident in assessing whether a company is worth investing in using my investment dollars.

    Perhaps a few exercise using HY results would also enhance my (and others) skills.

    I have certainly found your book very useful in re-assessing the company’s I have invested in. Thanks so much. Denise

  57. Great post. I actually had a good laugh this week watching some forums i am regularly on and seeing the fear and panic perpetuated by many. On Monday and Tuesday i simply stated that i had been given a great oppurtunity to top up my holdings in some great companies, and i wished everyone well with their stress and i will see them on the other side of the drama.

    What a week it was but the quality companies all bounced back and finished the week higher than last Friday’s close… I hope all the graduates took the oppurtunity like I did to top up?

    I have a question regarding your MQR Roger. When is the next book coming out as i presume your silence on the workings behind your MQR are a direct result of putting pen to paper to create value-able 2 with the focus being on determining quality etc. Am i on the right track? :-)

    • Like your thinking Andrew but no. I will gladly reveal my MQRs for a long time but I won’t be revealing the inputs for the MQRs. Not ever. That of course doesn’t preclude a book with all the MQRs in it!

      • Hear, hear Roger! There is more than enough info in Value.able for ppl to have their own rating system. With just the few discretionary inputs in calculating IV there are so many posts on why a person doesn’t get the same value for IV..

        Imagine how many “why isn’t so and so a B3?” posts there’d be if you gave your calculations. Your generosity in posting MQRs is more than enough for me.

  58. Excellent post Roger.

    The time to sell is always a difficult question obviosuly i can be related to intinsic value being eclipsed either being reached or by a margin but hard and fast rules take away the art of the decision to sell.

    For the right company it might be never a good time to sell particularily if the intrinsic value continues to increase. Warren Buffett bought Coca Cola below intrinsic value and has not sold it despite the share price rising well above its intrinsic value and the issues that it has had in that time. It is one of his permanent holdings as he calls them. He is then able to let the share price do as it wants.

    Granted MCE is no Coca Cola but if intrinsic value continues to rise and its is even better if you have acess to 100% of the operating cash flows of the business as Berkshire does in many cases although not Cocal Cola Company it may never be a good time to sell.

    As can be seen a buy and hold strategy is only for very special companies and intrinsic value increases and the financial risk of the company must be monitored at each report and in between where time allows.

    I could only hope to find companies to buy and hold forever that increase in intrinsic value greater than inflation. Then you have reached investing nirvana but these are few and far between.

  59. Nice post Roger. There is always so much emphasis on the buy side of the equation. I note that some fund manager you know well recently sold Matrix, having bought them only recently. For me, if a share price is above what I estimate to be its IV, the length of time it is likely for IV to catch up is the main consideration. If it is going to take two years to get there, I’m not inclined to wait given I can get a guaranteed 12% return in that time in the bank. Probably depends a bit on the company in question as well which makes it all even more subjective.

    Hey Ash, I think there is a sentence or two in there for you, too! Something about selling, CGT and some such.

    • LOL Greg Mc,

      Yepper, But WOW is now in something else,

      Not as excited as the oil floaties but still very happy

  60. Nice article roger and this should be an interesting discussion.

    Its the biggest grey area in investing and there is always the chance you sell and then realise you made a mistake. Personally i think you need to back yourself, if you think it is right to sell, then sell and don’t worry about what the price then does. This is on the proviso that the sell decision was based on rational and fundamental reasons and not emotionally due to some market fluctuation.

    I remember holding Tabcorp when it reached $18 and thought that was a crazy price for a company that wasn’t necessarily performing well and had some big headwinds coming that could place big pressure on the price. I saw that as an opportunity that i couldn’t miss and jumped on it and took a profit as it was unlikely to happen again, feel a little bit sorry for the person who bought them at $18 but thats the nature of the game. So if an irresistable opportunity comes then you need to take it.

    Another big selling decision is the “uh oh, i made a mistake” decision which i think everyone here can say they have been in at one time or more, i know i have (Telstra, ING entertainment come to mind). This is where you realise you made amistake and instead of holding and hoping it gets better, it is better to simply cut your losses and learn a lesson.

    If a company is at a slight premium to my values or my 2 year-out forecasts and there are no better opportunity i will hold however as long as the competitive position hasn’t changed and just accept the dividends. If an opportunity arrives i might then sell and buy into that.

    Then there is the personal reasons, i don’t believe in building wealth and holding onto it. You should be able to enjoy it as well if there is a use. The best example for this i have is that i sold shares to help give my fiance and i a good starting point to pay for our wedding as the intrinsic value to me for that wedding is worth far more than any A1 stock and rises every day.

    I think just as everyone here (with Roger’s help) has a rational and structured strategy when it comes to the buy side, i think it also needs an element of that for the sell side. You need to set yourself a form of guidelines for you to live by with selling down so that you can make rational and not emotional selling decisions, then back your judgement and don’t worry about what the price does after that as your decision was right for you.

    • Andrew / All,

      I got into Telstra a few weeks before receiving THE book, so, I’m holding an “uh oh, i made a mistake” stock.

      I bought in on advice from my broker, with the expectations of it going beyond $3. The story was that it is the biggest telecoms company in Aust, its market share is growing, and the ol’ NBN will help it along ( personally, I lament the NBN ).

      I’m not expecting (hoping?) it to fall any lower, but, I’m wanting to get my portfolio on the value.able path, which meant selling a hopeful company (CWE) yesterday for a very slight profit, and I now face the prospect of selling TLS at a loss.

      If I follow W. Buffet’s first and second rules, then I should hold the stock, however, had I followed THE books rules earlier, then perhaps I wouldn’t have bought it in the first place.
      So, does this now mean those rules no longer apply, and I sell ?!

      Any comments will of course, not be taken as advice. But, I’d really appreciate some thoughts.


      • Hi Ben,

        I bought TLS at $6.05 very early in my share market experience. The reason was to add a blue chip stock to my mainly junior mining portfolio. Despite paying dividends it was, and still is, my worst performing “investment”. Needless to say, by the time I got out, it had earned me a significant capital loss.

        What happens to TLS in the short term? Who knows! Remember the market, in the short term, is a voting machine…

        You have choices. You can cut and run now or you can wait until you find the right stock at a good discount to IV and then sell and reinvest. I don’t know which is the better choice.

        A few ppl have mentioned which Chapter they find the most beneficial in Value.able, for me, it was all of Part One. Part one doesn’t get a lot of mention here on the Blog but, to me, it’s the most important part of the book. You can’t value invest unless you have it clear in your head what it is and the mindset you need to be successful.

        Everyone quotes “fear” and “greed” as the two emotions you need to control. I’ve always added “regret” to that. If you sell out of Matrix too early, big deal. Forget about it and move on. You will have done your homework you will have sold “well above” intrinsic value and you made the “sell” decision. Congratulations! You also left a little on the table for the next guy.

        And now the big trait I’ve discovered through the book and this blog. As well as controlling “fear”, “greed” and “regret” you also need “patience”.

        Patience can be the difference between holding exceptional stocks and just good stocks. Patience means you know you’re in it for the long haul and enables you to turn the market off.

        It doesn’t matter if the market is booming and you can’t find anything to buy. If you’re patient, a war, a corporate or sovereign collapse, or natural disaster will be your next opportunity to buy.

        And if the market takes a plunge, you know you bought at a good discount to intrinsic value and that, in the long term, the market is a weighing machine and your stocks will bounce back. You just need patience.


      • Hi Ben the loss was incurred when you bought the stock not when you sell it.

        Remember time is the friend of a wonderful business and the emeny of a bad one.

        Time has been the enemy of TLS and I can’t see that changing anytime soon.

        Better options elsewhere IMHO

      • Ben,

        I was in a similar position and came to the view that if I was not comfortable holding the company long-term, why would I persist holding it short-term in the hope that it might rise. This is speculating. I decided to take the money off the table and invest it in a better prospect that I had some confidence will rise.

        As a side benefit, if you follow Value.Able principles and make some nice capital gains in the future, the capital loss from your previous poor investments will help to offset tax payable against those future gains.

        This is what I did with some of my old pre-Value.Able dogs. You obviously have to consider your own circumstances in deciding what is the best course of action for your situation.

      • I actually done well with Telstra…the first shares I ever bought when they first floated and I only purchased them because my boss recommened them….then my parents told me to sell them whilst I was living overseas and got just under $9.00 a share…. it wasnt investing it was speculating and pure arse.

  61. Hi Roger,

    A very intersting read, particularly the new info about Henderson and Malaga.

    I have to ask, you have an IV for MCE of $10.26 in the Eureka Report, and in the above article you also state you believe MCE’s IV to be rising over the next few years. Which according to the Buffet / Montgomery method of investing would not a time to sell (Unless you wanted cash for an even better A1 oppurtunity)…

    Yet reading this article my question that came to mind was what are you really saying?… Do you still believe Matrix is a wonderful company trading at a small discount to IV, with IV rising at a good clip?

    • Thanks Adam but I have to confess to having some very smart friends (thanks again Chris) who did the grunt work on that. I went to WA on the weekend though and met up with one of the company engineers. Couldn’t be more content than currently about the company’s long term prospects.

  62. Very timely article Roger,

    It seems to me that both the cost savings and production increases have been significantly understated. When considered along with the growing demand for their products and the lack of close substitutes it is very hard to argue against rising future IV’s.

  63. Brilliant summary of the ‘Time to Sell’ story Roger. As usual your timing is impeccable and your subject matter ‘oh so right for the times’. Well done and thank you.

    Cheers, Raymond

  64. Thank you Roger for your timely article.

    After reading your blog last year when you mentioned Matrix ($4.04) I immediately went and read all I could about the company and was very impressed and subsequently purchased a few shares. Despite the rapid rise in the company’s share price (and the fact that this rapid rise has put it above my price for ‘fair value’ I have never considered selling.)

    The prospects are too bright, management too astute, R&D strong and affective, products too superior (and new products coming to market diversifying revenue streams) for me to take money off the table just because it is above my price for ‘fair value.’

    A question for you Roger.

    Knowing our (humans) ineptitude in accurately predicting the future, well documented in many studies, why do you try and predict IV 1 year in advance, 2 years in advance, using analyst EPS predictions as an input into your calculations? This I find counterproductive and dangerous and instead settle for being able to answer with some degree of confidence, Can this business be significantly larger in 3-5-10 years time?

    With respect to Matrix my answer is yes although I have no confidence in being able to determine its IV for next year or the year after that, too many variables.

    I was reading Philip Fisher the other day and will end my post with his ending sentence in the chapter ‘When to Sell’ from ‘Common Stocks and Uncommon Profits.’

    ‘Perhaps the thoughts behind this chapter might be put into a single sentence. If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.’

    • Hi Nick,

      Not Roger, but would like to share what I have learned so far from him and comments in this blog…

      Analyst consensus forecast EPS is a starting to point for valuing future IV. After all, none of us have the time and ability to gain access management like analyst. That said, we all know that analyst then to be over-optimistic and linear in their forecast, we have to critically assess whether we agree with their assumptions. Some factors includes whether forecast ROE is too high, whether POR is too low.

      Hence, you may find that there’s a range of forecast IV (rather than just one valuation).

      In terms of growth of a business, I think JBH is a classic example where it had a very good growth story which ultimately became a matured business. So as much as I would like MCE to ‘grow forever’, I don’t think it will. So my take is… enjoy the ride while it last.

      Lastly, I do strongly encourage you to read Roger’s Value.able chapter 13 Getting out (as stated in the post above).

      Hope this helps

      • Analyst forecasts aren’t worth the paper they are written on. As Roger has frequently mentioned, very few analysts bother to increase the number of shares the company issues in future years, so their EPS forecasts will be high.
        Analysts also have a rosy view of the future for companies they cover, and you’ll rarely find forecasts declining in future years.
        You also have to consider the companies past results. For companies like Amcor with positive and negative abnormal items almost every year must, it must be almost impossible to make forecasts within cooee of what the company will actually report.
        And with 12 out of 13 brokers having a buy or out-perform rating on Qantas, are these the people you really want to trust with making forecasts?


    • Nick,

      Whilst I can’t answer for Roger, my view is that EPS forecasts are extremely important. If you don’t use them, it’s almost (for me) like investing in a company with no idea of it’s intrinsic value.

      I believe that the art of investing comes in having a consistent model and having a feel as to the persistence and strength of future earnings. Otherwise, what is the future value likely to be? Relying on analysts forecasts by themselves is risky. One should think about the likely accuracy based on future potential and your view of the world. It’s clearly not black and white (hense everyone has different views) however for me it is an integral component and probably more important than current value.

      • For analyst forecasts to be of any worth they have to be accurate and trying to predict earnings 2-3 years in advance with precise accuracy is nearly impossible for most companies with decent growth prospects (due to the fact that many events will arise in the meantime which were impossible to predict when the initial prediction was made.)

        As an example, on my comsec page for Matrix 2 months ago analysts estimated the company would make 44c a share and now they are predicting they will make 56c (around 30% upgrade) a share for FY ending 2011.

        For FY ending 2012 analysts project Martrix will make 58c a share whilst 2 months ago analysts were projecting they would make 61c a share…..

        This figure I believe will be way off, my belief only.

        These are people who change their minds consistently, which is not a criticism, it’s good to keep an open mind, it’s just ridiculous to state with any certainty the future earning potential of a company whilst there are so many variables which could affect the share price which you have no knowledge of beforehand and so cannot take into consideration when making that prediction.

        Be very wary when using analyst forecasts to try and accurately predict future IV, they are a whimsical bunch and the most fair weather of friends.

      • Thats great Nick and don’t forget two points;

        1) Approximately right rather than exactly wrong, and
        2) Conservative and wrong rather than optimistic and wrong.

      • I tend to agree with Nick as using analysts’ forecasts in a valuation model is often akin to the problem of garbage in is garbage out as you don’t know how various analysts’ estimates are arrived at. But if you don’t have the capabilities or time or alternative model, using analysts’ forecasts to determine IV is better than not calculating any IV at all and solely relying on broker reports.

      • I should also add that good news tends to be produced by good companies. I have personally benefitted greatly from analysts being slow to upgrade. I think McKinseys results might show a very different picture of the total universe of stocks was separated by quality. A1 analyst expectations may fall less as full year results approach (they may even rise). Now that would be really value.able!

      • Nick,

        Agree about the accuracy of some forecasts but I find that it is a necessary task. I use them as a guide and not gospel. I don’t use comsec eps forecasts as I find them often to be way out of line – sometimes they are good but too inconsistent.

      • Hello Steve, why do you find it a necessary task??

        This is what I can’t understand. Why investors feel the need to try and accurately determine what a company will be worth next year by using such a shoddy method (because it includes analysts predictions) when they (analysts) cannot possibly in most instances make these predictions!

        (The difficulty in making predictions extends even to the most able of managements, compare the profit expectations made by the management of Matrix in their prospectus to their actual results!)

        I see that I haven’t succeeded at all by trying to convince people otherwise although just for your own amusements work out an IV for 2013 for your favorite company and then do this every couple of months up until 2013 and keep track of the results and see just how brilliant these analysts really are.

        There are many pitfalls in using analysts estimates to calculate future IV rather than simply asking can this company be significantly bigger in the near future and I am really surprised that Roger continues to advocate such a practice.

      • Thanks for the chart Roger and thank you Matthew also.

        Incredible the fluctuations in EPS predictions over the course of the year(s) (especially recently) and that was analysts making predictions for THAT year. Imagine how shoddy that chart would look if instead of analysts predictions for current years we were instead looking at analysts predictions for future year’s earnings!

        And this is exactly my point. Any model which utilises analyst forecasts for future earnings as an input to calculate future IV is severely compromised by the inability of analysts to make these predictions with any degree of accuracy.

      • Nick,
        You are 100% correct, and this really makes a mockery of value investing which is based upon fundamentals, but then reverts to guesswork for future calculations.
        Value investors who do this are hardly in any position to make fun of “chartists” who basically practise the same thing.


      • Charlie Munger was famously asked what made him such a successful investor. His response? “My guesses are better than yours”. There is a thread of value investor (followed by Ben Graham purists) who suggest that all forecasts are meaningless and only historical information should be used. A more modern version pegs future growth of everything at zero (same thing).

      • Nick,

        I understand that you have a different view. However there is nothing that will ever sway me from the idea that you have to have a feel for where the earnings are headed in the next couple of years.

        To me, it simply makes sense and by not doing so I think I’d be shooting myself in the foot.

        Nothing is certain, but if I don’t do this then I can’t get an idea of what the risk/reward equation and what is the likely margin of safety in the next couple of years.

        Just because something is okay now and has the potential to be bigger in the future, does not necessarily prove that there is value in making that investment.

        Having an understanding of where earnings are headed and the ability to have a rough (conservative) idea is where the art-form comes in to the picture.

        The way I’d summarise my view of analyst forecasts EPS is that they are a tool. You can either agree with them or disagree. If you disagree, then you are saying that you have a better idea and thus utilise your own forecast EPS.

    • You will have to go back to the early days on the blog and find my comments about the range of valuations I produce. I have two models with different earnings drivers. I prefer to buy when the price is below both extremes of the valuation band. EPS has problems because analysts don’t correctly reflect changes to shares on issue very quickly. Also earnings forecasts tend to be optimistic. For very high quality businesses, they can often be too conservative and this is useful to keep in mind, if the company is relatively young and not widely covered by analysts.

  65. Kent Bermingham

    Another great post Roger, have read the book for the second time and it is interesting to watch the share price of A1 companies recently including Matrix, ARP, FGE and Oroton etc being sold down by the speculators and Mr Market offering more opportunites for long term Investors and graduates gettiong into theses companies that continue to offer long term growth.
    Great book and blog

    • Mr Market might have been a little less impressed with ORLs results than the others. I still haven’t gone through it properly but I note that the online presence has been going well and I also think that the expansion into SE Asia is likely to work well. I can’t help but feel that the shmick ORL offering will suit Asian shoppers.

      • Kent Bermingham

        I agree and surely we must not base our “Investment” decisions on visiting one outlet at a definite point of time. As you know restructuring takes considerable time and it is great to be with great companies with little or no debt to ride this period out and pick up the benefits in the future.

      • I began getting nervous about ORL in February. When the price was so good and I couldn’t shake my worries I sold out (for a nice 45% rise in 10 months).

        Then last Tuesday Mr Market became concerned about nuclear power stations and presented me with a great buy opportunity. By chance I was actually watching the live reports on Japan and the markets (which I normally never do) and was able to buy on the short term dip when the MOS increased significantly. (FGE $5:60 now back at $6.60. Missed SWL at $2.06, now back to $2.50)

        Much more good luck than skill but Rogers teachings were at the heart of my thinking and decisions. I missed SWL and others due to having only a small cash pool. Warren Buffett says we should always remain reasonable liquidity so we can take advantage of Mr Market. Last Tuesday certainly reinforced that.

      • “Warren Buffett says we should always remain reasonable liquidity so we can take advantage of Mr Market”

        How can that possibly work as the extra liquidity dissappears the moment you take advantage of an ‘opportunity’. If you always keep say 10% in cash then that 10% will never go to work.

      • It is an art Mikael, there are no hard and fast rules… Some here say be fully invested most of the time, others say 40% or more cash most of the time.

        I believe that over time you will do better if you hold a bit of cash and occasionally use that cash to buy on the dips, or hopefully, the crashes! It will also save you from selling good shares at distressed prices.

        The amount that you hold is going to be personal and will be influenced by what your opinion is of the risks vs the rewards of cash vs non-cash investments.

        I don’t like holding a lot of cash, so holding a moderate amount encourages me to find opportunities for it!

      • I agree, Matt. But, it was a good feeling to have cash available last week and jump in on some good opportunities.

    • Hi Roger, Kent & fellow bloggers

      Is it just me or have the A1’s(except ORL) fallen a lot less in the last few days than the rest of the market?. FGE had a blink-it-and-you-miss-plummet to $5.57, but other than this,there have been few opportunities.


      • You are quite right Jim. One of the major benefits of being a value investor, and always ensuring you buy outstanding businesses at a substantial discount to IV, is that the stock register tends to have fewer traders and punters, thus a bad day comes and you don’t get millions of shares dumped at ridiculous prices.

        I have written before about the out performance of my portfolio in the past 12 months, and that is as much about what you don’t buy, as it is about what you do buy.

        All the best

        Scott T

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